An investor is considering purchasing an ordinary share exactly 8 months before the next dividend payment D is to be made. The share pays annual dividends in perpetuity that are expected to grow at a rate of g < i per annum compound, where i is the annual money rate of return. (i) Show formally that the present value at the time of purchase of the future dividend 1 stream described above equals: D. (1+i)3 i-g (ii) The investor purchases the shares at a price of £25.30 per share. Furthermore, it is known that the next dividend payment will be £1.40 per share and the expected growth rate, g, is 6% per annum. Hence, making use of the expression found in part (i), estimate the annual yield that the investor is likely to realise from this investment. You should quote your answer to the nearest 0.1%. (iii) Assuming that future inflation is at a rate of 4% per annum, estimate the expected effective real rate of return per annum, to the nearest 0.1%, that the investor would achieve from this purchase.
An investor is considering purchasing an ordinary share exactly 8 months before the next dividend payment D is to be made. The share pays annual dividends in perpetuity that are expected to grow at a rate of g < i per annum compound, where i is the annual money rate of return. (i) Show formally that the present value at the time of purchase of the future dividend 1 stream described above equals: D. (1+i)3 i-g (ii) The investor purchases the shares at a price of £25.30 per share. Furthermore, it is known that the next dividend payment will be £1.40 per share and the expected growth rate, g, is 6% per annum. Hence, making use of the expression found in part (i), estimate the annual yield that the investor is likely to realise from this investment. You should quote your answer to the nearest 0.1%. (iii) Assuming that future inflation is at a rate of 4% per annum, estimate the expected effective real rate of return per annum, to the nearest 0.1%, that the investor would achieve from this purchase.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Solve it using formulas, no tables
correct answers are:
ii) NPV(11%)= 3.6912
NPV(12%)= -1.0684
Therefore, i= 11.8%
iii) i'= 7.5% pa
Transcribed Image Text:An investor is considering purchasing an ordinary share exactly 8 months before the next
dividend payment D is to be made. The share pays annual dividends in perpetuity that are
expected to grow at a rate of g < i per annum compound, where i is the annual money rate
of return.
(i) Show formally that the present value at the time of purchase of the future dividend
1
stream described above equals: D.
(1+i)3
i-g
(ii) The investor purchases the shares at a price of £25.30 per share. Furthermore, it is
known that the next dividend payment will be £1.40 per share and the expected
growth rate, g, is 6% per annum. Hence, making use of the expression found in
part (i), estimate the annual yield that the investor is likely to realise from this
investment. You should quote your answer to the nearest 0.1%.
(iii) Assuming that future inflation is at a rate of 4% per annum, estimate the expected
effective real rate of return per annum, to the nearest 0.1%, that the investor would
achieve from this purchase.
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