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Please could you explain how to get share price of £3,20. Question was: dividends to be just paid now £0.40, dividend growth 5%, required return 20%, corporation tax 25%,
thank you
From the formula sheet, Po = (Do(1+g))/(Re – g)
Do = 40c; g = 0.05; Re = 0.2.
So Po = 280c
However, the formula gives the ex div value (i.e. the MV if the dividend has just been paid).
The question says that the dividend about to be paid is 40c, so we need a cum div value.This is 280 + 40 = 320c (or $3.20)
(The tax is not relevant!)
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