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Question 26 (12 Marks) BGL Ltd has just paid a dividend of $1.36 per share to its shareholders. The firm is expected to maintain the same dividend amount to be paid out at the end of each of the next 3 years. After that, the dividend is expected to grow at a constant growth rate of 5% per annum indefinitely. (a) Why do firms issue shares? (1 mark) (b) What is a dividend? (1 mark) (c) Explain in words the use of Dividend Discount Model (DDM) in share valuation. (2 marks) (d) Draw a cash flow diagram representing the expected dividend payments received by shareholders of BGL Ltd. Be as specific as possible. (2 marks) (e) If the required rate of return of an investor is 9% per annum, calculate the value of share BGL 3 years from now. Should you include the expected dividend amount at the end of year 3 into your calculation? Explain. (3 marks) (f) Suppose that you have no idea how to answer part (e) but you may assume that the value obtained is P. (Even if you know how to evaluate part (e), suppose you don't.) Explain in words how would you determine the current value of share BGL using this piece of information. (3 marks) Question 26 (12 Marks) BGL Ltd has just paid a dividend of $1.36 per share to its shareholders. The firm is expected to maintain the same dividend amount to be paid out at the end of each of the next 3 years. After that, the dividend is expected to grow at a constant growth rate of 5% per annum indefinitely. (a) Why do firms issue shares? (1 mark) (b) What is a dividend? (1 mark) (c) Explain in words the use of Dividend Discount Model (DDM) in share valuation. (2 marks) (d) Draw a cash flow diagram representing the expected dividend payments received by shareholders of BGL Ltd. Be as specific as possible. (2 marks) (e) If the required rate of return of an investor is 9% per annum, calculate the value of share BGL 3 years from now. Should you include the expected dividend amount at the end of year 3 into your calculation? Explain. (3 marks) (f) Suppose that you have no idea how to answer part (e) but you may assume that the value obtained is P. (Even if you know how to evaluate part (e), suppose you don't.) Explain in words how would you determine the current value of share BGL using this piece of information