A share you are interested in paid a dividend of €1 last month.The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate.The discount rate is 12%.Calculate the expected price of the share.

Question

Quizplus · Accepted Answer

To find the expected price of the share, we can use the dividend discount model, which is:

P = D1 / (r - g)

Where:
P = price of the share
D1 = dividend expected next year
r = discount rate
g = growth rate of dividends and earnings

We are given that:
- D0 = €1 (paid last month)
- g1 = g2 = 25%
- g = 5%
- r = 12%

Using the formula for the dividend growth rate, g, we can calculate the expected dividends for the next two years:

D1 = D0 × (1 + g1) = €1 × (1 + 0.25) = €1.25

D2 = D1 × (1 + g2) = €1.25 × (1 + 0.25) = €1.56

Now, we can use the dividend discount model to find the expected price:

P = €1.56 / (0.12 - 0.05) = €21.05

Therefore, the best choice is C (€21.05).

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