Please show COMPLETE working including formulas used, no shortcuts please as I a

Question

Please show COMPLETE working including formulas used, no shortcuts please as I am confused with how to get the answer. Thanks

a)

b)

A company has just paid its first dividend of $0.40. Next year's dividend is forecast to grow by 15 percent, followed by another 15 per cent growth in year two. From year three onwards dividends are expected to grow by 3 percent per annum, indefinitely. Investors require a rate of return of 12 percent for investments of this type. The current price of the share is: (round to nearest cent;

Explanation / Answer

a)

Year 1 dividend = 0.4 * 1.15 = 0.46

Year 2 dividend = 0.46 * 1.15 = 0.529

Year 3 dividend = 0.529 * 1.03 = 0.54487

Present value at year 2 = D1 / K - G

Present value at year 2 = 0.54487 / 0.12 - 0.03

Present value at year 2 = 6.0541

Present value of 6.0541 = 6.0541 / ( 1 + 0.12)2

Present value of 6.0541 = 4.8263

Present value of year 2 dividend = 0.529 / ( 1.12)2

Present value of year 2 dividend = 0.42172

Present value of year 1 dividend = 0.46 / ( 1.12)

Present value of year 1 dividend = 0.413

Current share price = 0.413 + 0.42172 + 4.8263

Current share price = $5.7

b)

Year 1 dividend = 2 * 1.12 = 2.24

year 2 dividend = 2.24 * 1.03 = 2.3072

Present value at year 1 = 2.3072 / 0.13 - 0.03

Present value at year 1 = 23.072

Present value of 23.072 = 23.072 / ( 1 + 0.13)

Present value of 23.072 = 20.4177

Present value of year 1 dividend = 2.24 / 1.13

Present value of year 1 dividend = 1.9823

Stock price = 1.9823 + 20.4177

Stock price = 22.4

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