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 =  D_{0 /} K_e           

    P₀ =  6 /15%

          = Sh.40 (no growth)                                                                                                   

b) P₀ =  6(1.05) /0.15-0.05

         = Shs.63 (5% growth rate)