Weasley plc has just paid a dividend of 15p per share. Next year’s dividend is expected to be 12% higher and thereafter dividends are expected to grow at a rate of 4% per annum. The cost of capital for Weasley is 8%. the company is faced with an investment opportunity which will require dividends to be reduced to 4p per annum for the next five years. Dividends in six years will be 18p and they will then grow at 6% per annum. However, the market believes that the new investment increases the riskiness of Weasley plc with the result that the cost of equity capital rises to 9%. Using the dividend share valuation model, what will be the share price (to the nearest £0.01) without the investment opportunity (i) now and in (ii) four years’ time? a.(i) £4.20 and (ii) £4.39 b.(i) £4.20 and (ii) £4.91 c.(i) £3.75 and (ii) £4.39 d.(i) £3.75 and (ii) £4.91 e.none
Weasley plc has just paid a dividend of 15p per share. Next year’s dividend is expected to be 12% higher and thereafter dividends are expected to grow at a rate of 4% per annum. The cost of capital for Weasley is 8%. the company is faced with an investment opportunity which will require dividends to be reduced to 4p per annum for the next five years. Dividends in six years will be 18p and they will then grow at 6% per annum.
However, the market believes that the new investment increases the riskiness of Weasley plc with the result that the
Using the dividend share valuation model, what will be the share price (to the nearest £0.01) without the investment opportunity (i) now and in (ii) four years’ time?
a.(i) £4.20 and (ii) £4.39
b.(i) £4.20 and (ii) £4.91
c.(i) £3.75 and (ii) £4.39
d.(i) £3.75 and (ii) £4.91
e.none
Weasley plc has just paid a dividend of 15p per share. Next year’s dividend is expected to be 12% higher and thereafter dividends are expected to grow at a rate of 4% per annum. The cost of capital for Weasley is 8%. the company is faced with an investment opportunity which will require dividends to be reduced to 4p per annum for the next five years. Dividends in six years will be 18p and they will then grow at 6% per annum.
However, the market believes that the new investment increases the riskiness of Weasley plc with the result that the cost of equity capital rises to 9%.
Using the dividend share valuation model, what will be the share price (to the nearest £0.01)
with the investment opportunity (i) now and in (ii) four years’ time?
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aNone of the above
b(i) £4.01 and (ii) £4.12
c(i) £4.01 and (ii) £5.54
d(i) £4.06 and (ii) £4.12
e(i) £4.06 and (ii) £5.54
Consider the possible answers provided in questions 1 and 2 (this question does not imply that any specific answer in the previous two questions is correct). Consider the following statements:
I. If the answers shown in (b) in each question are correct, the company should go ahead with the investment
II. If the answers shown in (b) in each question are correct, the company should not go ahead with the investment
III. If the answers shown in (c) in each question are correct, the company should go ahead with the investment
IV. If the answers shown in (c) in each question are correct, the company should not go ahead with the investment
Which of the statements is correct?
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a.Both I and IV are correct
b.Both II and III are correct
c.Both II and IV are correct
d.Given the answers in questions 1 and 2 it is not possible to say which statements are correct
E.Both I and III are correct
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