Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.
1. Dial Inc. expects to pay a dividend of $1.80 at the end of the year. Dividends will grow at 25% until year 3. After year 3, the firm will have a retention rate of 35% and reinvest at a return on equity (ROE) of 20%. The required return is 15%. What is the current share price?
Growth rate = Return on Equity*Retention Rate
Growth rate after Year 3 = 20%*0.35 = 7%
Current share price is equal to the present value of all future dividends
= 1.80/(1.15) + 1.80(1.25)/(1.15)^2 + 1.80*(1.25)^2/(1.15)^3 + 1.80(1.25)^2(1.07)/(1.15)^3 (15%-7%)
= $29.85
Hence, the answer is $29.85
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period....
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