Question

a) Consider the following information for company XYZ:

Current dividend = 4n

Dividend 2years ago= 3.3n

Current equity beta=1.6

Equity risk premium=10%

Risk free rate=5%

Calculate the price of a share for this company. [5marks]

Answer 1

$Expected return = risk-free rate+beta(market risk premium)$

$ER = 5 +1.6(10)$

$ER = 21percent$

$Dividend growth rate = \frac{4+3.3}{2}$

=3.65%

$share value = \frac{expected annual dividend}{expected rate of return-dividend growth rate}$

$share value =\frac{4n}{21-3.65}$

$share value = 23.05n$