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Hi,
Would you mind helping me with this question?
A company has just paid a dividend of 0.23$ per share.
Shareholders are expecting the dividend to remain at 0.23$ per share next year, but to
increase at an average of 3% per annum thereafter.
Shareholder required return is 12% and the rate of corporation tax is 25%What will be the current market value per share ( to the nearest cent)
correct answer: 2.56
my answer: 2.63
I don’t understand what formula needs to be used
Thank you in advance,
SP
You use the dividend growth formula from the formula sheet.
The answer would be 2.63 if the current dividend was 0.23 and it was growing immediately.
However, because it is going to be 0.23 in one years time and only then growing, the 2.63 is the value in one years time.So in one years time we have a dividend of 0.23 and also a figure from the formula of 2.63 – a total of 2.86
To get a market value ‘now’ we need to discount this for one year at 12%
2.86 discounted for one year at 12% is $2.56.
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