Question

ABC is expected to pay a dividend of $1.25 every six months for the next four years. The current share price is $25.76 and the relevant discount rate is 14% (compounded semi-annually). What do you expect the share price at the end of year 4 to be?

a. $28.82

b. $26.74

c. $31.44

d. $25.12

Please don't use the PVA formula.

Answer 1

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.07^a	d=b*c
1	$       1.25	0.934579	$       1.17
2	$       1.25	0.873439	$       1.09
3	$       1.25	0.816298	$       1.02
4	$       1.25	0.762895	$       0.95
5	$       1.25	0.712986	$       0.89
6	$       1.25	0.666342	$       0.83
7	$       1.25	0.62275	$       0.78
8	$       1.25	0.582009	$       0.73
Present value of dividend			$       7.46
Present value of share price at the end year 4 = current price - present value of dividend
=$25.76-7.46
=$18.3
Share price after 4 years = $18.3*(1+0.07)^8
=$31.44
Correct Option : c. $31.44