The required rate of return on the shares in the companies identified below is 10% pa....

The required rate of return on the shares in the companies identified below is 10% pa. Calculate the current share price (ex-dividend) in each case. (a) The current earnings per share of Alpha Ltd are $3.80. The company does not reinvest any of its earnings. Earnings are expected to remain constant. (b) Gamma Ltd is planning to reinvest earnings and not pay dividends until year 10, when a divide of $8 is expected (D10 = $8). Dividends are expected to grow at 3.25% pa forever after that.

Expert Solution

a)

Price : Dividend /Required return

= 3.80 / .10

=$ 38 per share

b)Terminal value at year 10 :D10(1+g)/(rs-g)

8(1+.0325)/(.10-.0325)

8*1.0325 /.0675

122.37037

Current price = PVF10%,10*CF10

= .38554 *(8+122.37037)

= .38554 * 130.37037

= $ 50.26 per share

*

**find present value factor using the formula :1/(1+i)^n

jeff jeffy answered 1 year ago

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