Question

In: Finance

Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next...

Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next 3 years its growth rates will be 30 per cent, 28 per cent and 24 per cent, respectively. Last week it declared a dividend of $1.67. After 3 years, the company expects a more stable growth rate of 8 per cent for the next several years. The required rate of return is 14 per cent.

a Calculate the dividends for the next 3 years, and find its present value.

b Calculate the price of the share at the end of year 3, when the company settles to a constant growth rate.


c What is the current price of the share?

Solutions

Expert Solution

a

Required rate= 14.00%
Year Previous year dividend Dividend growth rate Dividend current year Total Value Discount factor Discounted value
1 1.67 30.00% 2.171 2.171 1.14 1.9044
2 2.171 28.00% 2.77888 2.77888 1.2996 2.13826
3 2.77888 24.00% 3.4458112 3.4458112 1.481544 2.32582
PV of dividends Sum of discounted value = 6.37
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend for the year
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

b

Required rate= 14.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon b. value Total Value Discount factor Discounted value
1 1.67 30.00% 2.171 2.171 1.14 1.9044
2 2.171 28.00% 2.77888 2.77888 1.2996 2.13826
3 2.77888 24.00% 3.4458112 b. 62.025 65.4708112 1.481544 44.19093
Long term growth rate (given)= 8.00% c. Value of Stock = Sum of discounted value = 48.23
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
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

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

8. Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three years,...
8. Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three years, the company’s dividend growth rates will be 30 percent, 28 percent, and 24 percent, respectively. Last week it paid a dividend of $1.67. After three years, management expects dividend growth to stabilize at a rate of 8 percent. The required rate of return is 14 percent. (9 points) a. Calculate expected dividends for each of the next three years, and calculate their present value....
Travel Australia Pty Ltd is a company that provides elite travel experiences in Australia.  Top 4wd Pty...
Travel Australia Pty Ltd is a company that provides elite travel experiences in Australia.  Top 4wd Pty Ltd has three directors: John, Chris and Michelle.  John has been appointed the managing director.  Michelle is appointed as an independent non-executive director.  Chris is a qualified chartered accountant, and the board refers to him for his accountancy skills.  The company maintained a good profit for the first three years of operation but has recently experienced an increase in cost, causing some financial strains on the company. Despite...
As the new marketing manager for Fast Fones Industries Pty Ltd , a company that manufactures...
As the new marketing manager for Fast Fones Industries Pty Ltd , a company that manufactures mobile phones you need to learn about the accounting system for the business. Why is it important that marketing managers have some understanding of the accounting processes within a manufacturing business for which they work?
Chevron Australia Holdings Pty Ltd v Commissioner of Taxation
Chevron Australia Holdings Pty Ltd v Commissioner of Taxation
ABC Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, ABC...
ABC Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, ABC Ltd has reported significant increases in sales and net income in recent years. While sales increased from $50 million in 2009 to $120 million in 2018, profit increased from $3 million to $12 million over the same period. The stock market and analysts believe that the company’s future is very promising. In early 2019, the company was valued at $350 million, which was three...
DC is a fast-growing company supplying office products. The following FCFs are projected during the next...
DC is a fast-growing company supplying office products. The following FCFs are projected during the next three years, after which the FCF is expected to grow at a constant 8 percent rate. The required WACC is 12 percent. Year 1 2 3 FCF (R million) 30 40 50 Required: 8.1. Calculate DC’s terminal, or horizontal, value. 8.2. Calculate the current value of operations for DC. 8.3. Assuming that DC has R10 million in marketable securities, R100 million in debt, and...
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans....
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options: A. Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020. B. Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted...
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans....
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options: A Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020. B Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted...
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans....
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options: A Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020. B Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted...
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans....
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options: A Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020. B Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT