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Analysts forecast that Michael Hill’s dividends in 2019, 2020 and 2021 will be the same amount...

Analysts forecast that Michael Hill’s dividends in 2019, 2020 and 2021 will be the same amount as the dividends paid in 2018 which was 0.05. After 2021 dividends will increase by 2% p.a. What is a fair price for a Michael Hill share in 2019? Required rate of return is 9%

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Answer #1

Fair price of share is equal to the present value of all future dividends

Fair Price= 0.05/(1.09) + 0.05/(1.09)2+0.05/(1.09)3+0.05(1.02)/(0.09-0.02)(1.09)3

= 0.05*0.917 + 0.05*0.842 + 0.05*0.772 + 0.72857*0.772

= $0.689

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