Assume that BHF Ltd has a current growth rate of 10% p.a. that is expected to...

Assume that BHF Ltd has a current growth rate of 10% p.a. that is expected to be maintained for only another three years and then fall to 5% p.a., where it is expected to remain indefinitely. Given that the required return on BHF's shares is 12% and that the last dividend of 50 cents has just been paid, the price of BHF's shares will be:

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Expert Solution

Year 1 dividend = 0.5 (1 + 10%) = 0.55

Year 2 dividend = 0.55 (1 + 10%) = 0.605

Year 3 dividend = 0.605 (1 + 10%) = 0.6655

Year 4 dividend = 0.6655 (1 + 5%) = 0.69878

Value in year 3 = Year 4 dividend / required rate - growth rate

Value in year 3 = 0.69878 / 0.12 - 0.05

Value in year 3 = 0.69878 / 0.07

Value in year 3 = 9.98257

price per share = Present value of cash flows

Present value = Future value / (1 + rate)^time

Present value = 0.55 / (1 + 0.12)^1 + 0.605 / (1 + 0.12)^2 + 0.6655 / (1 + 0.12)^3 + 9.98257 / (1 + 0.12)^3

Present value = 0.49107 + 0.4823 + 0.47369 + 7.1054

Present value = $8.55

jeff jeffy answered 1 year ago

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