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Parta) Taylor plc has just paid a dividend of 1.80 per share. The company will increase its dividend by 25 per cent next year, and
Parta) Taylor plc has just paid a dividend of 1.80 per share. The company will increase its dividend by 25 per cent next year, and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 10 per cent dividend growth, after which the company will keep a constant growth rate forever. The required return on Taylor plc shares is 12 per cent. Required: i. Using the dividend growth model, calculate the current share price of Taylor plc. Explain your workings. ii. The question assumes that Taylor plc will continue to pay dividends forever. Comment on the reasonableness of this assumption and explain the circumstances in which it might be violated. Part b) Archer plc is experiencing rapid growth. The company expects dividends on its ordinary shares to grow at 20 per cent per year for the next four years before levelling off at 8 per cent into perpetuity. The required rate of return on the company's ordinary shares is 12 per cent. Archer plc has just paid a dividend of 3. To help finance the initial growth, Archer plc has just issued some new preference shares. The issue will pay a 10 annual dividend in perpetuity, beginning five years from now. The market requires an 8 per cent return on this investment. Required: i. Calculate the current price of one ordinary share of Archer plc. Explain your workings. ii. Calculate the current price of one preference share of Archer plc. Explain your workings. iii. Explain the differences between ordinary shares and preference shares
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