Allandale Pty Ltd(APL) is a large Australian proprietary company that builds small luxury boats and employs 200 people. The company has been operating for 10 years. One year ago, the company underwent a major expansion of its boat-building facilities because of increased demand for its boats from overseas buyers. In keeping with the company constitution, APL had issued equal amount of shares to 22 shareholders, giving each 25 000 ordinary shares at $20 per share. The constitution also states that dividends on shares have to be paid equally to each shareholder, and in the event that shareholders wished to sell their shares, the shares first had to be offered to the other shareholders.

The company has been paying each shareholder $21 500.00 each financial year as constant dividend over last 4 years. Shareholders are not happy with this dividend payment system and badly criticised the company dividend policy at the last annual general meeting. They demanded from the Chairman to design an effective dividend payment system in accordance with company growth. One of the shareholders suggested that the company could introduce constant dividend growth model as opposed to zero growth model. While supporting the dividend proposal, another shareholder suggested that the company could go for non- constant dividend growth model when it encounters financial difficulties. The shareholders also requested the Chairman to determine the approximate value of their shares. The Chairman, who has no good knowledge about dividend growth models, directed the finance manager to submit a detailed report.

Last year, APL had an EPS of $4.50. The company also had a return of equity of 17%. The finance manager believe that 15% is an appropriate required return for the company. He has examined the company financial statements, as well as those of their competitors. Although APL currently has a reputational advantage, his study indicates that other companies are investigating ways to improve their own standing. Given this, the finance manager believes that APL reputational advantage will last for only the next five years. After that period, the company's growth will probably slow to the industry growth average of 8%. Based on the above assumptions, the Finance manager of APL asked your support to prepare a report.

In your report:

1.Define dividend growth model and evaluate its suitability for estimating company share price.

2.Compare and contrast constant dividend growth model and non- constant dividend growth model and evaluate its impact on company earnings per share (EPS) and long-term growth.

3.Analyse the behaviour of APL shareholders in terms of a capital market theory, such as Modern portfolio theory or arbitrage pricing theory.

4.Estimate the share price for APL based on the above information.