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Jeremy recommends that they invest in an IT start-up established by a friend of his, a...

Jeremy recommends that they invest in an IT start-up established by a friend of his, a just listed firm called SMARTIT. SMARTIT shares cost $5:15 each and the prospectus promises a dividend of 15c per quarter, as well as forecasting capital growth of 20% per year. Being a startup, SMARTIT has never made a profit in its 3 years of existence. Its shares have changed in price by 22%, -15%, and 35% over the last three years.

Q1. Calculate the current dividend return on SMARTIT

Q2. What has SMARTIT’s average p/a capital growth been? If SMARTIT share price grows over the next three years by that average, then what will the share price be in three year's time?

Please give the specific calculate process. TY

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Answer #1

Q1)

Current dividend rate= Annual Dividend/Share Price

Annual Dividend=$0.15*4=$0.60

Price=$5.15

Current dividend rate=$0.60/$5.15=11.65%

Q2)

For average capital growth we need to calculate the geometric average.

Geometric average=(((1+r1)*(1+r2)*(1+r3))^(1/3))-1

=((1.22*0.85*1.35)^3)-1
=0.118676 or 11.8676%

Share price in 3 years time=$5.15*(1.118676^3)=$7.21

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