Bonds Concept?

Question

Abc Ltd, has just issued a dividend of $1.25 per share on their ordinary shares that have a face value of $1.00. Dividends have been increasing at a rate of 4% pa and this trend is expected to continue for another year. After that the growth rate is expected to be 6% pa for three years before settling down into the long term growth rate of 5% pa.If the market requires a return of 12% pa on these shares:

question: what is the expected price five years from now?

Answer 1

First -- this has nothing to do with bonds -- it is an equity question.

Second -- I am not going to do this for you -- but I will give you a formula that you can use.

The Dividend Growth Model says that stock price should be equal to:

P = D/(r-g)

where D is the dividend, r is the required return and g is the growth rate. It assumes that g < r and that g is constant.

One thing you need to worry about here -- D is the dividend that will be paid in a year. This is not going to be the $1.25 -- but will be $1.25*(1.04) -- because 4% growth is assumed for the first year.

Answer 2

Do your own homework!