Answer:
Correct answer is : 3) 7%
Explanation:
Expected share prices are determined using dividend discount model. Under constant growth assumption of dividend, dividend and share price grow at the same rate. The capital and dividend yield remain same.
Let us assume:
Constant growth rate = g
If in year 5, expected share price =$35
In year 8, expected share price will be = $35 * (1 + g) 3
Hence,
$35 * (1 + g) 3 = $42.87651
=> (1 + g)3 = $42.87651 / $35 = 1.225043
=> g = 7%
As such option 3) is correct. All other options are incorrect.
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