Question

(b) GMX Ltd is a fast growing company. The company expects to grow at a rate of 20% in the first two years, and then by 11% for the next three years. Followed by this, the company is expected to settle to a constant growth rate of 4%. The first dividend is expected to be paid next year and will be equal to $4. What is the current price of this share, given that an investor's required rate of return for the share is 10% p.a.? (4 marks) (c) John owns share of KMP Ltd. The company recently paid a dividend of $5. It is expected that the company will grow at a constant rate of 4% for the foreseeable future. What is the expected price of the share 4 years from now, if John's required rate of return for the share is 8% p.a.? (2 marks)

Answer 1

b)

B4 : X V fix =NPV(B1,B7:B10,B11+B3) 1 Required Rate of return 2 Constant growth rate 3 Horizon value at the end of 5th year 4 Current pprice of the stock 5 6 Year 10% 4% 113.79 $90.37 $ Expected Dividend 8 9 10 11 uwn 4.8 5.3 5.9 6.6 12 13

b)

B4 : x fc =NPV(B1,87:B10,811+B3) в с D E F 1 Required Rate of return 2 Constant growth rate 3 Horizon value at the end of 5th year $ 4 Current pprice of the stock 8% 5% 91.53 $71.16 6 Year Expected Dividend 2.04 2.08 2.12 2.4 2.6 10 5 11 12 13 14

c)

i) UPDATES AVAILABLE Updates for Office are ready to be installed, but first we need to close some apps. Update now B3 - X ✓ fr =NPV(B1,B6:39) B C D E F G H I J K L 1 Required Rate of return 2 Constant growth rate 3 Current price of the stock 8% 4% $18.22 5 Year Expected Dividend 5.2 5.41 5.62 5.85 70 12

c)

=PV(B2,B3,B4,B5) co $ Face Value Discount rate Time to maturity Coupon Rate FV B 1,000 10% 10 5% $4,000,000 ($1,542,173.46) 1542 IPV No. of bonds to be issued