The dividends of ordinary shares of LMN Corporation has been experiencing an ann
ID: 2784252 • Letter: T
Question
The dividends of ordinary shares of LMN Corporation has been experiencing an annual growth rate of 10%.The present dividend per share is P 1.20. The investor is requiring a 15% rate of return.Required:Calculate the current valueof LMN's 200 ordinary sharesunder each of the followingindependent conditions. a) dividends to continue growing at a constant rate of 10% _________.b)dividend growth rate is anticipatedto decrease by 1.5%and to remain constantat that level P______.c)Dividend growth rate is expected to increase to 12.5%and to remain constantat that level P_____.
Explanation / Answer
Current Year dividend = $1.20
Required rate = 15%
a.
Growth rate = 10%
Stock price = $1.20 × (1 + 10%) / 15% - 10%)
= $1.32 / 5%
= $26.40
Current Stock price is $26.40.
b.
Growth rate = -1.50%
Stock price = $1.20 × (1 - 1.50%) / 15% + 1.50%)
= $1.182 / 13.50%
= $8.76
Current Stock price is $8.76.
c.
Growth rate = 12.50%
Stock price = $1.20 × (1 + 12.50%) / 15% - 12.50%)
= $1.35 / 2.50%
= $54
Current Stock price is $54.00
.
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