Question

A business is to pay a dividend per share of $1.1 for the upcoming year. It's expected they can maintain a dividend growth of 15% each year for the next 3 yrs. It comes to term that the growth rate is going to decrease to 5 per cent p.a. and remains at that level forever. The required rate of return on the shares is 12 per cent p.a.

- What is the current share price
- If the market is $20.00, should the company buy this stock?

Answer #1

i. The current share price is equal to the present value of future dividends

The current share price = $21.34

Screenshot with formulas

ii. Yes, the company should buy this stock because the market price ($20.00) is less than the value of the stock ($21.34)

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