Answer:
Price of share today = $21.302
Explanation:
<em>The price of a share can be calculated using the dividend valuation model </em>
<em>According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return</em>.
If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:
Price=Do (1+g)/(k-g)
Do - dividend in the following year, K- requited rate of return , g- growth rate
S<em>tep 1 : PV of dividend from year 1 to 3</em>
Year PV of Dividend
1 0.25 × 1.1^(-1) = 0.227
2 0.50 × 1.1^(-2) = 0.413
3 1.25 × 1.1^(-3) = 0.939
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<em>Strep 2 : PV of dividend from year 4 to infinity</em>
PV (in year 3 terms) of dividend= 1.25 × 1.05/(0.1-0.05) = 26.25
PV in year 0 terms = 26.25
× 1.1^(-3) = 19.72
Present Value = 0.227 + 0.413
+ 0.939 + 19.72 = 21.302
Price of share today = $21.302