You have gathered the following information about Firm D: the current earnings per share for theyear are £0.25, and the company has just paid out 18% of the earnings as cash dividend toshareholders. The investors require a minimum equity return of 12.25%. You project that Firm D willretain 70% of its earnings for the next two years. For the subsequent two years, the firm plans onretaining 50% of its earnings. The dividend payout ratio will then increase to 60% in the followingyear. From that point forward it will retain only 10% of its earnings. The earnings growth rate is 21%until the end of year 4, and 15% for the subsequent two years. For the period thereafter theearnings and dividend growth rate will slow to a long term rate of 4.5%.Calculate the fair value of the company's shares using the dividend discount model.

AnswerThe fair value of Firm D's shares is calculated to be £3.88. Part 2: ExplanationTo calculate…

Answered: You have gathered the following…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 15P

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