Unicorn Inc. is expected to grow by 20% p.a. for the next two years and then grow by 8% p.a. thereafter. The company currently pays an annual dividend of $1.50/share and is expected to maintain a constant payout ratio.

a.  Using the appropriate dividend discount model and assuming investors require a 15% p.a. rate of return, what is the per share value of Unicorn, Inc.?

b.   Assuming Unicorn was currently trading at $25/share, and leaving your growth rate assumptions for years 1 and 2 unchanged, what approximate terminal growth rate assumption would be required to have your DDM model produce this price?

Answer rating: 100% (QA)

SOLUTION a To calculate the per share value of Unicorn Inc we can use the dividend discount model V ... View the full answer