QUESTION 1

SBS Transit is expected to pay dividends of 50 cents per share at the end of the year. The company's dividends will then grow by 8% p.a. in periods 2 and 3, and 7% p.a. in periods 4 and 5, before settling down to a perpetual growth rate of 4% p.a.

Required:

(a)Calculate the maximum amount you would be prepared to pay for an SBS Transit share assuming you intend holding them for only two years and assuming a required rate of return of 12% p.a.

(b)Under what circumstances would an annually increasing dividend yield be considered to be a negative indication of a company's prospects?

(c)How much would you be prepared to pay for a share in two years' time that pays a 15c dividend each year and is currently priced at $2? Assume the required rate of return is 7.5% p.a.