Question

In: Finance

1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are expected...

1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are

expected to grow at a constant rate of 8% per year indefinitely, what will

be the share price (to the nearest dollar) in 2 years- time, if investors

require a return of 12%?

A) $135

B) $189

C) $146

D) $126

2.A share currently sells for $28 a share. Its dividend is growing at a constant

rate, and its dividend yield is 5 percent. The required rate of return on the

company’s share is expected to remain constant at 13 percent. What is the

expected share price seven years from now?

A) $47.99

B) $24

C) $29.40

D) $30

plz show the process, I will thum you up

Solutions

Expert Solution

1. Share Price after 2 years=D3/(required rate - growth rate)

D3=D0*(1+growth rate)^n=6*((1+8%)^3)=6*1.2597=7.5583

Share Price after 2 years=7.5583/(12%-8%)=$189.0

Option B is correct

2. Dividend yield=5%

Dividend(D0)/Share Price=5%

D0=5%*28=1.4

==> Required rate of return=dividend yield+growth rate

13%=5%+growth rate

growth rate=8%

Sahre price =D7/(required rate - growth rate)

D7=D0*(1+growth arte)^7=1.4*(1+8%)^7=2.3994

Sahre price seven years from now=2.3994/(13%-8%)=$47.99

Option A is correct

jeff jeffy answered 2 years ago

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