Manly Cove Manufacturing Company is listed on the ASX and has released information that details its expansion plans for the next decade.The information release indicates that next year's dividend will be increased to $1.10 and is expected to grow at a constant rate of 5% per annum thereafter.The required rate of return for this type of company is considered to be 13 per cent.Based on this information,what price would you expect the share to trade at after the release of the information?

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the share can be calculated using the dividend discount model, which takes into account the expected future dividends and the required rate of return. The formula for the dividend discount model is:Share Price = Present Value of Future Dividends / Required Rate of ReturnThe present value of future dividends can be calculated using the following formula:Present Value of Future Dividends = Dividend / (Required Rate of Return - Dividend Growth Rate)In this case, the dividend next year is $1.10, the dividend growth rate is 5%, and the required rate of return is 13%. Plugging these values into the formula, we get:Present Value of Future Dividends = $1.10 / (0.13 - 0.05) = $13.75Therefore, the share price is expected to trade at $13.75 after the release of the information.

Manly Cove Manufacturing Company Is Listed on the ASX and Has