(a) ENI is a limited liability company engaged in oil exploration along the Gulf of Guinea in West Africa. The company is listed on Ghana Stock Exchange. In 2012 ENI Ltd struck oil and the management thinks that this will enhance profitability. As a result, the company’s dividend per share of 8.0 paid to shareholders last year will be increased by 12% annually for the next three years. However, if a new oil is not found the rate of growth in dividend will be reduced by 5% after the three years for another three years and if the situation stays the same, it will be reduced by a further 4% and will stay at that rate of growth forever. Shareholders require 10% return. As an investment banker, you are contemplating buying shares in ENI limited for your new client who has just expressed interest in investing in an oil exploration company in Ghana (i) Calculate the price you will be prepared to pay for a share in ENI limited using the Dividend Discount Model (DDM). What can you say about the share price and the dividend growth?
(a) ENI is a limited liability company engaged in oil exploration along the Gulf of Guinea in West Africa. The company is listed on Ghana Stock Exchange. In 2012 ENI Ltd struck oil and the management thinks that this will enhance profitability. As a result, the company’s dividend per share of 8.0 paid to shareholders last year will be increased by 12% annually for the next three years. However, if a new oil is not found the rate of growth in dividend will be reduced by 5% after the three years for another three years and if the situation stays the same, it will be reduced by a further 4% and will stay at that rate of growth forever. Shareholders require 10% return.
As an investment banker, you are contemplating buying shares in ENI limited for your new client who has just expressed interest in investing in an oil exploration company in Ghana
- (i) Calculate the price you will be prepared to pay for a share in ENI limited using the
Dividend Discount Model (DDM).
What can you say about the share price and the dividend growth?
Step by step
Solved in 4 steps with 2 images
