Question

TMD Ltd is expected to pay a dividend of $1.00 per share next year and market...

TMD Ltd is expected to pay a dividend of $1.00 per share next year and market analysts expect
this dividend to grow at 12% p.a. the following year, 10% p.a. the year after that, 8% p.a. the
year after that, before stabilizing at 6% p.a. for the foreseeable future. If the required return on
these shares is 8% the share price today should be closest to:
a) $51.83.
b) $55.68.
c) $56.52.
d) $70.52
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Homework Answers

Answer #1

correct option is "b"-55.68

Year Dividend PVF@8% Present value of dividend (D*PVF)
1 1 .92593 .92593
2 1(1+.12)=1.12 .85734 .96022
3 1.12(1+1.1)=1.232 .79383 .97800
4 1.232(1+.08)= 1.33056 .73503 .97800
4 70.51968 .73503 51.83408
Share price today 55.68

#

Horizon value at year 4 =D4(1+g)/(rs-g)

= 1.33056 (1+.06) /(.08-.06)

= 1.33056 *1.06 /.02

= 70.51968

Find PVF from present value table or using the formula 1/(1+i)^n where i = 8% and n=1,2,3,4

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