10 Equity Share Valuation,

(a) The Sci-Fi Entertainment Company currently pays a dividend on its ordinary shares of £0.12 per share. The required rate of return in the market on such shares is 9 per cent. Calculate the value of an ordinary share assuming the following conditions:

1) zero dividend growth;

2) a constant dividend growth rate of 4 per cent forever; and 3) a constant dividend growth rate of 4 per cent per year for the next three years followed by a constant annual growth rate of 3 per cent per year indefinitely thereafter.

(b) State the limitations of the above valuation models.