Briefly discuss the relationship between the following: (Word limit 50-70 words) i. Share price and investors required rate of return ii. Share price and divided growth rate
b. Otama LTD has an issue of preference shares outstanding that pays a $2.85 divided every year. If this issue currently sells for $77.32 per share, what is the required return?
c. Price Tigers LTD expects to pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5.1% per year, indefinitely. If you require a return of 11% on your investment, how much will you pay for the company’s share?
i) Share price and investors required return has inverse relationship.
If required return increases then share price will be decrease
If required return decrease then share price will be increase
Share price = Dividend / Required return
ii) Share price and dividend growh has positive relationship
If dividend growth increase share price increases
If dividend growth decrease share price decreases
Share Price = Dividend / (Required return - Growth rate)
Dividend = D = $2.85
Share Price = P0 = $77.32
Required return = D / P0
= $2.85 / $77.32
Therefore, required return is 3.69%
Expected dividend = D1 = $3.25
g = growth rate = 5.1%
r = required return = 11%
Share Price = D1 / (r-g)
= $3.25 / (11%-5.1%)
= $3.25 / 5.9%
Therefore, company's share price is $55.08
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