Question

An equity analyst is estimating PLK Ltd’s share price at the end of four years from today. The company has recently paid a dividend of $1.30 which is expected to grow at 4% p.a. over the foreseeable future. If the company’s required rate of return on equity is 10% the analyst’s price estimate at the end of year 4 will be closest to:

Group of answer choices

$21.70.

$25.35.

$26.40.

$22.50.

Answer 1

​P₄ =D₅/(Cost of capital - Growth rate)

P₄ = Stock Price at the end of year 4.

D₄​=Value of the dividend at the end of year 5

Dividend at the end of year 5

Current Dividend =$ 1.30

Dividend at the end of year 1 =$1.30(1+4%) =$ 1.352

Dividend at the end of year 2 =$1.352(1+4%) =$ 1.40608

Dividend at the end of year 3 =$1.40608 (1+4%) =$ 1.4623232

Dividend at the end of year 4 =$1.4623232(1+4%) =$ 1.520816128

Dividend at the end of year 5 =$1.520816128(1+4%) =$ 1.58164877312

Price at the end of year 4 = 1.58164877312/(10% - 4%)

= 26.3608128853

=$26.40 ( rounded as per the answer choice)

The price at the end of year 4 will be closest to $ 26.40