Question

Bronze Company Ltd last paid a dividend of $0.20 per share. This dividend is expected to...

Bronze Company Ltd last paid a dividend of $0.20 per share. This dividend is expected to grow at 15% per annum for three years, then at 10% per annum for the next three years, after which it is expected to grow at a 5% rate forever.

REQUIRED:

(i) Calculate the price you would pay for the share if your required rate of return is 10%?

(ii) Calculate the price you would pay for the share if you expected to hold the share for only three years

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Answer #1

(i) The stock price today is equal to the present value of future dividends.

Price = $6.14

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(ii) The share price doesn't depend on our holding period. Whether we plan to hold for one year or 3 years, we will have to pay the same price of $6.14

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