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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) P0 = D0 / Ke
P0 = 6 /15%
= Sh.40 (no growth)
b) P0 = 6(1.05) /0.15-0.05
= Shs.63 (5% growth rate)
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