Shengyuan Company has just paid a cash dividend of 20 cents per share.

a) Shengyuan Company has just paid a cash dividend of 20 cents per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady rate of 4% per year, what is the current value of the share? What will the share be worth in five years? Show working out.

b) Drongo Corporation is considering an investment with a payback of five years and a cost of $12000. If the required return is 8%, what is the worst-case NPV? Explain. Show working out.

Expert Solution

a]	Current value of the share [per the constant dividend growth model] = D0*(1+g)/(r-g)
	where,
	D0 = last dividend
	r = required return
	g = growth rate in dividends
	Therefore,
	*Current value of the share = 0.201.04/(0.16-0.04) =**	$ 1.73
	Value of the share after five years = D6 [expected dividend for the 6th year]/(r-g) = 0.20*1.04^6/(0.16-0.04) =	$ 2.11

b]	Annual cashflow = Initial investment/Payback period = 12000/5 =	$ 2,400
	Worst case NPV = -12000+2400(1.08^5-1)/(0.081.08^5) =	$ (2,417)

Part [b] There are no details as to base/best/worst case parameters. Hence, the worst case has

been considered as when the project life ends at the end of the year.

jeff jeffy answered 2 years ago

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