a. Mordialloc Optical Pty Ltd declared a dividend of $2.15 yesterday. The compan

Question

a. Mordialloc Optical Pty Ltd declared a dividend of $2.15 yesterday. The company is expected to grow at a steady rate of 5 per cent for the next several years. If shares such as these require a rate of return of 15 per cent what should be the market value of this share? b. Exego Pty Ltd is expected to pay a dividend of $2.25 next year. The forecast for the share price a year from now is $37.50. If the required rate of return is 14 per cent what is the current share price? Assume constant growth. c. Cofield Pty Ltd is expected to grow at a constant rate of 7 per cent. If the company's next dividend is $1.15 and its current price is $22.35, what is the required rate of return on this share?

Explanation / Answer

a. Mordialloc Optical Pty Ltd declared a dividend of $2.15 yesterday. The company is expected to grow at a steady rate of 5 per cent for the next several years. If shares such as these require a rate of return of 15 per cent, what should be the market value of this share? Dividend Paid (D0) $2.15 Growth rate (G) 5% Required rate (R ) 15% Market value of share = D0x(1+g)/(R-g) Market value of share = $2.15x(1+5%)/(15%-5%) Market value of share = $22.58 b.Exego Pty Ltd is expected to pay a dividend of $2.25 next year. The forecast for the share price a year from now is $37.50. If the required rate of return is 14 per cent, what isthe current share price?Assume constant growth. Dividend next year (D1) $2.25 Required rate (R ) 14% Market value of share = $37.50 Market value of share = D1 x(1 + g)/(R-g) Putting above values in this equation we would calculate growth rate $37.50 = $2.25 x(1+ g)/(14%-g) $37.50 x(14% - g) = $2.25 + $2.25 g $5.25 - $37.50g = $2.25 + $2.25 g $37.50 g + $2.25 g = $5.25 - $2.25 Growth rate G = 7.55% Current share price = D1/(R -G) Current share price = $2.25 /(15% - 7.55%) $34.87 c. Cofield Pty Ltd is expected to grow at a constant rate of 7 per cent. If the company's next dividend is $1.15 and its current price is $22.35, what is the required rate of return on this share? Dividend next year (D1) $1.15 Growth rate G = 7% Market value of share (P0) $22.35 Required rate (R ) = D1/P0 + G Required rate (R ) = $1.15/$22.35 + 7% 12.15%

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