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Question 7B

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1 Question 7B on Wed Aug 03, 2011 4:59 am

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Calculate the share price of a company the pays a stable dividend of £1.15 pa when the required rate of return demanded by equity investors is 8%.

Use Zero Growth Model:



Replacing the variables with values from the question:



The share price is £14.38.

What will the price be if investors demand 12% to hold these same shares?

Use Zero Growth Model:



The new share price will be £9.58

What will the share price be under both scenarios if dividends grow by a rate of 1% pa?

Using the Gordon Growth Model:



Replacing the variables with values from the question where investor return is 8% and dividend growth is 1%:



The new share price will be: £16.43

Replacing the variables with values from the question where investor return is 12% and dividend growth is 1%:



The new share price will be: £10.45

What will the share price be under both scenarios if dividends decline at a rate of 1% pa?

Replacing the variables with values from the question where investor return is 8% and dividend growth is -1%:



The new share price will be: £12.78

Replacing the variables with values from the question where investor return is 12% and dividend growth is -1%:



The new share price will be: £8.85

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