Elk County Telephone has paid the dividends shown in the following table over th

Question

Elk County Telephone has paid the dividends shown in the following table over the previous 6 years: The firm's dividend per share next year is expected to be $8.51. a. If you can earn 11% on similar-risk investments, what is the most you would be willing to pay per share? b. If you can earn only 8% on similar-risk investments, what is the most you would be willing to pay per share? c. Compare your findings in parts a and b, what is the impact of changing risk on share value? a. If you can earn 11% on similar-risk investments, the most you would be willing to pay per share is $. (Round to the nearest cent.)

Explanation / Answer

Calculation of growth rate as shown below:

Dividend in 2010 = $6

Dividend in 2011 = $6.36

Growth rate = (6.36 - 6) / 6

                   = 6%

a)

P0 = D1 / (ke - g)

Where P0 is the Share price

Ke is the required return = 11%

g is the growth rate = 6%

D1 = $8.03 * ( 1+0.06) = $8.51

P0 = $8.51 / (11% - 6%) = 170.2

b)

P0 = D1 / (ke - g)

Where P0 is the Share price

Ke is the required return = 8%

g is the growth rate = 6%

D1 = $8.03 * ( 1+0.06) = $8.51

P0 = $8.51 / (8% - 6%) = $425.5

c)

Share value is increase if risk rate is decrease.

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