A share you are interested in paid a dividend of €1 last week.The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate.The discount rate is 12%.Calculate the expected price of the share.
A)€17.20
B)€17.90
C)€18.20
D)€19.40
E)€19.75

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend for the next two years:

Year 1 Dividend = €1 x 1.20 = €1.20
Year 2 Dividend = €1.20 x 1.10 = €1.32

Then, we can calculate the expected price at the end of Year 2:

P2 = D3 / (r - g) = €1.32 x (1 + 0.05) / (0.12 - 0.05) = €17.90

Therefore, the expected price of the share is €17.90, which corresponds to choice B.

A Share You Are Interested in Paid a Dividend of €1