Solution ( a ) | |||||
Horizon date is the date when the growth rate becomes constant. This occurs at the end of year 2 | |||||
Hence option (iv) is correct | |||||
Solution ( b ) | |||||
Year | Dividend | Dividend | |||
1 | 2.75*121% | $ 3.3275 | |||
2 | 3.3275*121% | $ 4.0263 | |||
Current Dividend | $ 4.026275 | ||||
Rate of return | 9.00% | ||||
Growth Rate | 3.00% | ||||
Horizon value | =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate) | ||||
'4.0262*(1+3%)/(9%-3%) | |||||
Horizon value | $ 69.12 | ||||
Solution ( c ) | |||||
Year | Dividend | PV factor @ 9% | Present Values | ||
1 | $ 3.328 | 0.9174 | $ 3.05 | ||
2 | $ 4.026 | 0.8417 | $ 3.39 | ||
2 | $ 69.118 | 0.8417 | $ 58.18 | ||
Total PV | $ 64.62 | ||||
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