Assume that XYZ Ltd has a current growth rate of 10% p.a.that is expected to be maintained for only another three years and then fall to 5% p.a. ,where it is expected to remain indefinitely.Given that the required return on ABC's shares is 12% and that the last dividend of 50 cents has just been paid,the price of ABC's shares will be:
A)$8.56.
B)$11.43.
C)$10.25.
D)$9.82.

Question

Quizplus · Accepted Answer

The correct answer is A. The price of ABC's shares will be $8.56. This is because the current growth rate of 10% p.a. is expected to be maintained for only another three years and then fall to 5% p.a. ,where it is expected to remain indefinitely. The required return on ABC's shares is 12% and that the last dividend of 50 cents has just been paid.

Assume That XYZ Ltd Has a Current Growth Rate of 10