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%. O a. $ 54.49 b. $ 24.19 c. $ 27.98 od. $33.28 O e. $ 41.23

Answer 1

c.$27.98

year	cash flow	present value factor @10%	cash flow * present value factor @10%
1	1.50 *(1.08)=>1.62	1/(1.10)=>0.9091	1.472742
2	1.62*(1.08)=>1.7496	1/(1.10)^2=>0.8264	1.44586944
2	30.3264 (terminal value see note)	1/(1.10)^2=>0.8264	25.061737
		price	$27.98.

working:

terminal value = year 2 dividend *(1 + constant growth rate) / (required return - growth rate)

1.7496 * (1.04) / (0.10-0.04)

=>30.3264