Example of Dividend Basis Valuation
Company Laxmi Synthetics pays a dividend of 10% on its Sh.60 par value ordinary shares. This company uses a discount rate of 15%. Assuming no growth, calculate the value of its ordinary share if there's growth of 5%, what would be the value of this company's ordinary shares.
a) P_{0} = D_{0 /} K_{e}
P_{0} = 6 /15%
= Sh.40 (no growth)
b) P_{0} = 6(1.05) /0.15-0.05
= Shs.63 (5% growth rate)