Michael has written an e-mail to his employees that describes a new product special that will be introduced to the customers nex
1 answer:
You might be interested in
Answer:
option (d) $18.24
Explanation:
Data provided in the question:
Dividend paid last year = $1.2
Dividend growth rate for 3 years, g = 10%
After 3 years Dividend growth rate, g' = 4%
Required return, r = 12%
Now,
Present vale factor, PVF =
Year Dividend PVF @12% Dividend × PVF
1 1.2(1+.10)= 1.32 0.89286 1.1786
2 1.32(1+.10)= 1.452 0.79719 1.1575
3 1.452(1+.10)= 1.5972 0.71178 1.1369
3(Terminal value) 20.7636 0.71178 14.7791
=====================================================
Current share price ∑(Dividend × PVF ) ≈ $18.24
Note:
Terminal value at year 3 =
=
= $20.7636
Hence,
The correct answer is option (d) $18.24