Question

A company XYZ paid a dividend of Rs.12 per share yesterday and is expected to pay dividend once per year in the future (at same calendar date as this year) which will grow at a rate 5% to eternity.
a)
Draw the cash flow diagram.
(1)
b)
If the expected market return is 12%, the risk-free rate is 5%, and the CAPM beta of the company XYZ is 0.8, what is the expected return on equity of the company?
(2)
c)
What is the expected current share price of the company from the dividend growth model?

Answer 1

The dividend growth gordon method is the best method to calculate the share price of the company.

a)

The cash flow diagram is as follows:

here n stand for number of years.

b)

The required rate of return is as follows:

risk free rate +(maket return-risk free rate)Beta

10.6%

c)

The expected price of the share is as follows:

Dividend(1+growth rate)/(required return-growth rate)

$