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 D 1, D 2, D 3 and D 4.

b) Find the present value of these four dividends.

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

d) Calculate the present value of P 4. 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.

Ans.