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A business is to pay a dividend per share of $1.1 for the upcoming year. It's...

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.

  1. What is the current share price
  2. If the market is $20.00, should the company buy this stock?
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Answer #1

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

The current share price = $21.34

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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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