Question

A fast growth share has the first dividend (t=1) of $2.41. Dividends are then expected to grow at a rate of 6 percent p.a. for a further 2 years. It then will settle to a constant-growth rate of 1.6 percent. . If the required rate of return is 16 percent, what is the current price of the share? (to the nearest cent)

Select one:

a. $17.95

b. $36.10

c. $16.74

d. $17.91

A company has its share currently selling at $18.70 and pays dividends annually. The company is expected to grow at a constant rate of 3 percent pa.. If the appropriate discount rate is 18 percent p.a., what is the expected dividend, a year from now (rounded to nearest cent)?

ABC Limited has a stable sales track record but does not expect to grow in the future. Its last annual dividend was $5.39. If the required rate of return on similar investments is 19 percent p.a., what is the current share price? (to the nearest cent; don't use the $ sign)

Answer 1

	Required rate=	16.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	2.41		2.41	1.16	2.0776
2	2.41	6.00%	2.5546		2.5546	1.3456	1.89848
3	2.5546	6.00%	2.707876	19.106	21.813876	1.560896	13.97523
	Long term growth rate (given)=	1.60%			Value of Stock =	Sum of discounted value =	17.95
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor