Assume a stock has earnings per share (EPS0) of £ 34.10 and a dividend pay-out ratio of53.3%. The required rate of return (discount rate) is 16% p.a. a) Calculate the price of the share using Dividend Discount Model assuming constant growth of dividends of 10% p.a. b) Calculate the price of the share using Dividend Discount Model assuming that earnings grow 30% p.a. during the first three years, followed by the constant growth of 10% p.a. starting from the beginning of the fourth year. c) Compare the calculated prices in part a) and b) and explain why they differ?
Assume a stock has earnings per share (EPS0) of £ 34.10 and a dividend pay-out ratio of53.3%. The required rate of return (discount rate) is 16% p.a. a) Calculate the price of the share using Dividend Discount Model assuming constant growth of dividends of 10% p.a. b) Calculate the price of the share using Dividend Discount Model assuming that earnings grow 30% p.a. during the first three years, followed by the constant growth of 10% p.a. starting from the beginning of the fourth year. c) Compare the calculated prices in part a) and b) and explain why they differ?
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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Assume a stock has earnings per share (EPS0) of £ 34.10 and a dividend pay-out ratio of53.3%. The required
a) Calculate the price of the share using Dividend Discount Model assuming constant growth of dividends of 10% p.a.
b) Calculate the price of the share using Dividend Discount Model assuming that earnings grow 30% p.a. during the first three years, followed by the constant growth of 10% p.a. starting from the beginning of the fourth year.
c) Compare the calculated prices in part a) and b) and explain why they differ?
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