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Kramer Ltd last paid a dividend of $0.20 three years ago. Today the company announced they...

Kramer Ltd last paid a dividend of $0.20 three years ago. Today the company announced they will resume paying dividends. The planned dividends are $0.40 in one year's time, $0.50 in two years' time, and thereafter dividends will increase by a constant rate of 3% p.a. indefinitely. If the required rate of return for Kramer is 11%, what is a fair price for one share today?

a.

$6.25
b.

$5.63
c.

$6.19
d.

$0.36
e.

$5.99
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Answer #1

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(0.5*1.03)/(0.11-0.03)

=$6.4375

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=0.4/1.11+0.5/1.11^2+6.4375/1.11^2

=$5.99(Approx).

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