Q7

Singapore Airlines annually pays out 60% of its earnings as dividends and expects to report an EPS of $10 in exactly one years' time. The company is currently able to earn a return on equity of 16.5% p.a. which will drop to 6% p.a. after five years (and forever after) due to increased competition in the sector. Moreover, Singapore Airlines shareholders' require a return on equity of 12% p.a. a. How much would a share of Singapore Airlines cost in exactly two years' time if there is no change in the company's payout policy after five years? (7 marks) b. How much would a share of Singapore Airlines cost in exactly two years' time if the company changes the payout ratio to 100% after five years (and forever after)? (7 marks) c. Determine which payout policy (that is, 6% constant or 6% until year 5 and 100% after that) leads to a higher share price in two years' time. Explain the reasons for your answer. (6 marks) Edit View Insert Format Tools Table 12pt Paragraph BIU A er T~ O