Question
2. Equity securities (9 marks) a) Company A's earnings and dividends per share are expected to grow indefinitely by 5% a year. If next year's
2. Equity securities (9 marks)
a) Company A's earnings and dividends per share are expected to grow indefinitely by 5% a year. If next year's dividend is $10 and the market capitalization rate is 8% p.a., what is the current stock price? (1 mark)
b) Company B is like Company A in all respects except one: Its growth will stop after year 4. In year 5 and onwards, it will pay out all earnings as dividends. What is Company A's stock price? Assume next year's EPS is $15. (6 marks)
c) If Company A (in part A) were to distribute all its earnings, it could maintain a level dividend stream of $15 a share. How much is the market actually paying per share for growth opportunities? (2 marks)
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