Three firms are all in the same type of business: Firm A will pay a dividend of £10/ share forever, Firm B will pay a dividend next year of £5 with growth thereafter of 4% per year, and, Firm C will pay a dividend of £5 next year with growth of 20% for the next five years and zero thereafter. If investors expect a return of 10% which firm will have the highest share price? How would your answer change if investors expect a return of only 7%?
Three firms are all in the same type of business: Firm A will pay a dividend of £10/ share forever, Firm B will pay a dividend next year of £5 with growth thereafter of 4% per year, and, Firm C will pay a dividend of £5 next year with growth of 20% for the next five years and zero thereafter. If investors expect a return of 10% which firm will have the highest share price? How would your answer change if investors expect a return of only 7%?
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
Three firms are all in the same type of business:
-
Firm A will pay a dividend of £10/ share forever,
-
Firm B will pay a dividend next year of £5 with growth thereafter of
4% per year, and,
-
Firm C will pay a dividend of £5 next year with growth of 20% for
the next five years and zero thereafter.
If investors expect a return of 10% which firm will have the highest share price?
How would your answer change if investors expect a return of only 7%?
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