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Q) XYZ Ltd last paid a dividend of $0.20 three years ago. Today the company announced...

Q) XYZ Ltd last paid a dividend of $0.20 three years ago. Today the company announced they will resume paying dividends. The planned dividends are $0.65 in one year's time, $0.75 in two years' time, and thereafter dividends will increase by a constant rate of 4% p.a. indefinitely. If the required rate of return for XYZ is 12%, what is a fair price for one share today?


a. $9.38

b. $8.37

c. $0.58

d. $8.95

e. $9.15

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Answer #1

Terminal value = Dividend year 2 * (1 + growth rate) / (required rate - growth rate) = $10.50

Stock price today = $8.95 Option D

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