Your company paid a dividend of R2.00 last year.The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter.The required rate of return on equity (ks) is 10 percent.What is the current price of the ordinary shares?

Question

Quizplus · Accepted Answer

The current price of the ordinary shares can be calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years using the given growth rates, then calculate the terminal value at the end of year 3 using the constant growth rate of 7%. Discount these cash flows back to the present value using the required rate of return of 10%. The correct calculation results in a price of approximately R67.47.

Your Company Paid a Dividend of R2