Question

Grf dividends are expected to have a 20 percent short term growth rate for the next four years.

beginning in year 5, the growth rate is expected to drop to 7 percent per year and last indefinately.

A. if grf paid a $3 dividend (div 0) and the appropriate discount rate is 15%, then what is the price of a share of Grf?

B. if you know that the short term return of a new investment is 18%, what should be the short term payout that allows a share price equal to 50$?

Answer 1

A) Statement showing price of share of Grf

Year	Dividend	PVIF @ 15%	PV
1	3 x 1.20 =	3.60	0.8696	3.13
2	3.60 x 1.20 =	4.32	0.7561	3.27
3	4.32 x 1.20 =	5.18	0.6575	3.41
4	5.18 x 1.20 =	6.22	0.5718	3.56
Horizon Value		83.19	0.5718	47.56
Price of share today	60.93

Thus price  of share of Grf = 60.93 $

Horizon Value = Dividend for year 5 / Required rate of retun - growth rate
required rate of return = 15%
Growth rate = 7%
Dividend for year 5 = Dividend for year 4 (1+ growth rate)
Dividend for year 5 = 6.22(1+7%)
= 6.22(1.07)
= 6.6554
Thsu Horizon Value = 6.6554/15%-7%
=6.6554/8%
= 83.19 $

B) If  short term return of a new investment is 18% , then

Payout = Share price x Return

= 50 x 18%

=9$

Thus short term payout must be 9$ that allows a share price equal to 50$