Question

16. Consider the valuation for the share of a company. The company’s next dividend will be paid immediately (i.e. after the purchase) and is equal to £3. Subsequently, dividends will arrive yearly. They are expected to grow at a rate of 10% per year, but stop growing at that rate once the dividend 3 years from now has been paid. After that, the growth rate of dividends is expected to be 2% and to stay at that level. The investor uses the required return of 8% to discount the payments when calculating the present value. Which of the following statements is not correct?

    1. a) The dividend in 3 years will be equal to 3 · 1.13 ≈ 3.99, and the dividend in 4 years will be equal to 3 · 1.13 · 1.02 ≈ 4.07.

    2. b) The present value of the first four dividends (i.e. the one which occurs immediately, and the three subsequent ones ending with the dividend in year 3) lies between £12 and £12.50.

    3. c) The present value of all remaining dividends starting in Year 4 lies between 53.50 and 54.50.

    4. d) The present value of the share lies above £53.

    5. e) The present value of the share lies below £66.

Answer 1