Kathleen Ferrero is interested in purchasing the ordinary shares of Vespertine Pty Ltd which are currently...

Kathleen Ferrero is interested in purchasing the ordinary shares of Vespertine Pty Ltd which are currently priced at $39.96. The company expects to pay a dividend of $2.58 next year and expects to grow at a constant rate of 8 per cent. a What should the market value of the share be if the required rate of return is 14 per cent? b Is this a good buy? Why or why not?

Expert Solution

Price of the share can be calculated by using dividend discount model by using below formula

P = D1/(k-g)

Where

D1 is year 1 dividend = 2.58

K is expected return = 14%

G is growth rate =8%

price = 2.58/(0.14-0.08) = 43

So market value would be 43 which is selling for 39.96 so it is a good buy

jeff jeffy answered 2 years ago

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