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  • Tutorial 3

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    JIA ERN GOH
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    The document discusses a company's current and proposed future share prices and dividends. It states that the current share price is $2.75 based on a dividend of $0.16 per share just paid, 3% growth rate, and 9% cost of capital. It then shows that under a proposal where the dividend reaches $0.25 per share in 3 years with a 4% growth rate, the resulting share price in 2 years would be $5, discounted back 2 years is $4.21, representing a $1.46 per share increase over current price. It concludes the proposal should be acceptable to shareholders.

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    The document discusses a company's current and proposed future share prices and dividends. It states that the current share price is $2.75 based on a dividend of $0.16 per share just paid, 3% growth rate, and 9% cost of capital. It then shows that under a proposal where the dividend reaches $0.25 per share in 3 years with a 4% growth rate, the resulting share price in 2 years would be $5, discounted back 2 years is $4.21, representing a $1.46 per share increase over current price. It concludes the proposal should be acceptable to shareholders.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    3 views2 pages

    Tutorial 3

    Uploaded by

    JIA ERN GOH
    The document discusses a company's current and proposed future share prices and dividends. It states that the current share price is $2.75 based on a dividend of $0.16 per share just paid, 3% growth rate, and 9% cost of capital. It then shows that under a proposal where the dividend reaches $0.25 per share in 3 years with a 4% growth rate, the resulting share price in 2 years would be $5, discounted back 2 years is $4.21, representing a $1.46 per share increase over current price. It concludes the proposal should be acceptable to shareholders.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    D1 to get Price Y0

    D5 to get Price Y4

    Current Share Price:

    Total dividend Just paid 1.6 million OK


    Number of shares 10 million OK
    Dividend per share just paid (Do) 0.16 OK
    Recent Growth Rate (g) 3% OK
    Next year dividend (D1) 0.1648 OK
    Cost of capital (k) 9% OK

    Current Share Price (Use DDM): 2.75 OK P0

    Share Price after Proposal:

    Dividend at the end of Year 3 (D3) 0.25 OK D3


    Expected Growth Rate 4% OK g
    Cost of capital 9% OK k
    Share price at end of Year 2 (P2 Using DDM) 5.00 OK P2
    Current Share Price (Discount P2 by 2 years) 4.21 OK P0

    The proposal will increase the wealth of shareholder by $1.46 per share increase 1.46 OK
    Therefore, it should be acceptable to the shareholders acceptable OK

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