Question

In: Finance

The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and...

The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and 15% p.a. during years 1 through 3 respectively. After that, the dividends are expected to grow at a long-run rate of 5% p.a. forever. The company’s current dividend per share is $1.50 and the required rate of return on the shares is 12% p.a. Based on this information, the current price should be closest to:

Expert Solution

VALUE of supper normanl growth rate

year cashflow pv@12% present value

1 $1.50(1.05)=1.575 0.893 1.41

2 $1.575(1.10)=1.7325 0.797 1.38

3 $1.7325(1.15)=1.9924 0.722 1.44

TOTAL=$4.23

VALUE of constant growth rate p3=d4/ke-kg

=1.9924(1.05)/0.12-0.06

=2.092/0.06

=34.87(it is terminal value)

present value of p3@t=0

=34.87*1/(1.12)3

=34.87*1/1.4049

=34.87*0.7117

=24.8202

PRESENT VALUE=$4.23+$24.8202

=$29.05

NOTE-

first we have found super growth rate,then we have to find constant growth rate through terminal value.

we have to convert terminal value in present value.

present value is equal supper growth rate + constant growth rate.

jeff jeffy answered 2 years ago

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