Question

1 & 2 PLEASE

1. Please compare the dividend to shareholders and the interest paid to bank from the table below perspective? (3 marks) It is called as Need profit? Compulsory? Interest paid to bank Dividend paid to shareholders Tax Company ABC's earnings and dividends per share are expected to grow at a steady rate of 5% a year in perpetuity. If next year's dividend is $10 and if shares such as these require a rate of return of 8% 2. , a. what is the current share price? (Correct to the nearest cent.) (2 marks) b. If the share is trading at $310 today in the market, is this share a good investment? Provide your reason. (1 mark)

Answer 1

1)	It is called as	Interest paid to bank	Dividend paid to shareholders
	Need profit?	No	Yes
	Compulsory?	Yes	No
	Tax	Yes	No
	[Deductibility]
2)
a)	Share price as per constant dividend growth model = D1/(r-g)
	where,
	D1 = Next expected dividend
	r = Required return
	g = Growth rate in dividend
	So current price of the share = 10/(8%-5%)	$                 333.33
b)	Yes, it is a good investment. The reason is that the market
	price is less than the intrinsic value of the share. That is the
	share is undervalued by the market.
	Buying it at $310 will realize higher returns.