Keegan plc has just paid a dividend of 12p per share. Next years dividend is expected to be 9% higher and thereafter dividends are expected to grow at a rate of 6% per annum. The current price of Keegans shares is 3.27.

The management of the company is faced with an investment opportunity which will require dividends to be reduced to 10p per annum for the next three years. Dividends in four years will be 20p and they will then grow at 7.5% per annum.

However, the market believes that the new investment increases the riskiness of Keegan plc with the result that the cost of equity capital rises by one percentage point.

Assuming that shares are priced according to the dividend share valuation model, what is (i) the required rate of return (to the nearest 1%) of Keegan plc with the investment opportunity and (ii) the expected share price in four years time (to the nearest 0.10)?

a

(i) 14% and (ii) 5.70

b

(i) 11% and (ii) 5.70

c

(i) 14% and (ii) 3.30

d

(i) 11% and (ii) 3.30

e

None of the above