7.27 Parri Holdings Pty Ltd declared a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecast a constant growth rate of 7 per cent for the next several years. The required rate of return is 18 per cent.

a Calculate the expected dividends D1, D2, D3 and D4.

b Find the present value of these four dividends.

c What is the price of the share 4 years from now (P4)?

d Calculate the present value of P4. Add the answer you got in part b. What is the price of the share today? e Use the equation for constant growth (equation 7.4) to calculate the price of the share today.