Financial management revision question and answer

Andreas Company Ltd. currently pays a dividend of Sh.2 per share and this dividend is expected to grow at an annual rate of 15% for the first 3 years then at a rate of 10% for the next 3 years after which it is expected to grow at a rate of 5% thereafter.

(i) What value would you place on the stock if an 18% rate of return were required? (7 marks)
(ii) Would your valuation change if you expected to hold the stock for only 3 years? Explain.
ANSWER
Price of share = PV (Future Dividends)
Over next 6 years +
PV of share at end of 6th year. I = 18%

Dividend
Year      Growth       Compounded (I + L)–n Present Value


(ii)No change with length of the indented holding period of 3 years. All that change is the proportions of the present values represented dividend yields and capital gain

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