DAA's shares are selling for R15 per share.The firm's income, assets, and share price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years.No dividends have been declared as yet, but the firm intends to declare a dividend of D3 = R2.00 at the end of the last year of its supernormal growth.After that, dividends are expected to grow at the firm's normal growth rate of 6 percent.The firm's required rate of return is 18 percent.The share is

Question

Quizplus · Accepted Answer

To calculate the present value of the share, we first need to find the expected dividends for the next 3 years as well as the terminal value.

Year 1 dividend = 2.00 x (1 + 0.15) = R2.30
Year 2 dividend = 2.30 x (1 + 0.15) = R2.64
Year 3 dividend = 2.64 x (1 + 0.15) = R3.04

Terminal value = 3.04 x (1 + 0.06) / (0.18 - 0.06) = R65.62

Now we can calculate the present value of the share:
PV = 2.30 / (1 + 0.18) + 2.64 / (1 + 0.18)^2 + 3.04 / (1 + 0.18)^3 + 65.62 / (1 + 0.18)^3
PV = R47.14

Since the current share price is R15, the share is overvalued by R32.14. Therefore, the correct answer is B.

DAA's Shares Are Selling for R15 Per Share