A fast growth share has the first dividend (t=1) of $1.20. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $1.20. Dividends are then expected to grow at a rate of 6 percent p.a. for a further 3 years. It then will settle to a constant-growth rate of 2.6 percent. . If the required rate of return is 13 percent, what is the current price of the share? (to the nearest cent)

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Expert Solution

D1=1.2

D2=(1.2*1.06)=1.272

D3=(1.272*1.06)=1.34832

D4=(1.34832*1.06)=1.4292192

Value after year 4=(D4*Growth rate)/(Required return-Growth rate)

=(1.4292192*1.026)/(0.13-0.026)

=14.0997971

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.2/1.13+1.272/1.13^2+1.34832/1.13^3+1.4292192/1.13^4+14.0997971/1.13^4

=$12.52(Approx)

jeff jeffy answered 2 years ago

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