Question

Limerick currently pays a dividend of $1.50 per share. Which comes closest to Limerick's price per share if we assume that their dividend grows by 8% for two consecutive years, and then grows by 4% each year (starting in year 3) thereafter forever? Use a required rate of return of 10%. a. $ 27.98 b.$ 33.28 C. $ 24.19 d.$54.49 e.$ 41.23

Answer 1

P0 = [{D0(1 + g)} / (1 + r)] + [{D0(1 + g)²} / (1 + r)²] + [{D0(1 + g)²(1 + g_c)} / {(r - g_c)(1 + r)²}]

= [{$1.50 x 1.08} / 1.10] + [{$1.50 x 1.08²} / 1.10²] + [{$1.50 x 1.08² x 1.04} / {(0.10 - 0.04) x 1.10²}]

= $1.47 + $1.45 + $25.06 = $27.98

Hence, Option "A" is correct.