Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?
Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?
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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WORKSHOP 8 EXAMPLES - Word
Practice Question 1
Guff plc, an all-equity firm, has the following earnings per share and dividend history
(paid annually).
Year
This year
last year
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Title
Subtitle
Intense E...
Strong
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Book Title
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Styles
Dividend per share
8p
7.5p
Earnings per share
21p
18p
7p
16p
2 years ago
6.5p
3 years ago
13p
4 years ago
14p
6p
This year's dividend has just been paid and the next is due in one-year. Guff has an
opportunity to invest in a new product, Stuff, during the next two years. The directors are
considering cutting the dividend to 4p for each of the next two years to fund the project.
However, the dividend in three years can be raised to 10p and will grow by 9% per annum
thereafter due to the benefits from the investment. The company is focused on
shareholder wealth maximisation and required a rate of return of 13% for its owners.
Required
a) If the directors chose to ignore the investment opportunity and dividends
continued to grow at the historical rate what would be the value of one share
using the dividend valuation model?
b) If the investment is accepted, and therefore dividends are cut for the next two
years, what will be the value of one share?
OND
Lawrence Anka
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DEI
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