Question

# BLT Ltd last paid a dividend of \$0.20 three years ago. Today the company announced they...

BLT Ltd last paid a dividend of \$0.20 three years ago. Today the company announced they will resume paying dividends. The planned dividends are \$0.50 in one year's time, \$0.60 in two years' time, and thereafter dividends will increase by a constant rate of 5% p.a. indefinitely. If the required rate of return for BLT is 12%, what is a fair price for one share today?

a) \$8.30

b) \$8.57

c) \$8.10

d) \$0.45

e) \$7.65

Here

D1 = 0.50

D2 = 0.60

After D2 the dividends will grow at 5% p.a

So, D3 = D2 * (1+g) = 0.60 * 1.05 = 0.63

Present value of dividends from D3 to indifinate period at end ofyear 2  = D3 / (r -g) = 0.63 / (0.12-0.05) = \$ 9.

Fiar price of share means present value of all cash flows from the stock.

PV of cash inflows from the stock :-

 years Dividends [email protected]% PV of dividends 1 0.5 0.892857 0.446429 2 0.6 0.797194 0.478316 2 9 0.797194 7.174745 Fiar price of stock 8.09949

Fiar price of stock = \$ 8.10

Option c is correct.

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