fair value of an
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:ABD Ltd expects dividends per share on its ordinary shares for the next two years to
be $2.3 and $3, respectively. Then the dividend will grow by 12% per annum till
infinity. If investors require a rate of return of 21% p.a., what is the fair value of an
ABD ordinary share today?
Expert Solution
Formula for calculating fair value of an ordinary share today
Fair value of ordinary share = Next dividend/(Required rate of return - Growth rate of dividend)
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