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Question 6:
A company has paid an annual dividend of $0.86 per share. Dividends are expected to grow by 3% per annum for next three years and by 5% per annum onwards for the foreseeable future. Company’s cost of equity is 12%. What is the current market value of ordinary shares?I got answer of 12.15$ through this method, pls check if its correct.
Step1: Calculate dividends for 3 years by compounding it by 3%
Step 2: Calculate MV of shares in 3 years time, using dividend value of dividend at end of year 3, g is 5% and Ke of 12
Step3: Discount the cash flows at 12% to get present value, which is our market value.I have no idea where you found this question, but surely there is an answer to it in the same book?
The steps you have listed are completely correct (but I do not have the time to check the final answer 🙂 )
I found this question from online notes while I was searching for your lecture on this topic. The notes did not had an answer, but if the steps are correct I believe the answer would be correct as well. Thanks for clearly explaining this concept
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