Question

ABC Ltd shares are assumed to be trading at their fair value of $49.02. The dividend per share next year is $3.98 and grows at a constant rate each year. The appropriate discount rate is 16% p.a.. What is the expected price of ABC shares 5 year from now? (round to nearest cent)

Answer 1

1)	Growth rate implied in the current price is to be
	found out.
	As per the constant dividend growth formula
	P0 = D1(r-g), where D1 = next expected dividend,
	r = required return or discount rate and g = growth
	rate in dividends.
	Substituting values we have,
	49.02 = 3.98/(0.16-g)
	0.16-g = 3.98/49.02
	0.16-3.98/49.02 = g =	7.88%
2)	The expected price per the constant dividend growth model at EOY 5 = D6/(r-g)
	Where, D6 = Expected divid,end for the 6th year
	r = required return or discount rate and g = growth
	rate.
	Substituting values into the above equation
	Price at EOY 5 = 3.98*(1.0788^4)/(0.16-0.0788) =	$          66.39