Mohan Gupta is the portfolio manager of an India - based equity fund. He is analyzing the value of Tata Chemicals Ltd. (Bombay Stock Exchange: TATACHEM). Tata Chemicals is India’s leading manufacturer of inorganic chemicals, and also manufactures fertilizers and food additives. Gupta has concluded that the DDM is appropriate to value Tata Chemicals.
During the past five years (fiscal year ending 31 March 2004 to fiscal year ending 31 March 2008), the company has paid dividends per share of Rs.5.50, 6.50, 7.00, 8.00, and 9.00, respectively. These dividends suggest an average annual growth rate in DPS of just above 13 percent. Gupta has decided to use a three - stage DDM with a linearly declining growth rate in stage 2. He considers Tata Chemicals to be an average growth company, and estimates stage 1 (the growth stage) to be 6 years and stage 2 (the transition stage) to be 10 years. He estimates the growth rate to be 14 percent in stage 1 and 10 percent in stage 3. Gupta has estimated the required return on equity for Tata Chemicals to be 16 percent. Estimate the current value of the stock.