QUESTION 3

You are advising a client who wishes to invest in A4 Ltd. The company has just paid a cash dividend of $1.20 per share. Your projections indicate that this dividend will grow at a steady 4 percent per year. Your client expects a 17% return from this investment, given A4s risk profile. Assuming your dividend projections are correct:

1. What is the current value of the share?
2. How much dividend will be paid in Year 5 and how much will the share be worth at that time?

You consult your boss regarding your assumptions. She has a different view of projected dividends for A4s. She believes that the companys new product will be a great success resulting in abnormal profits for the next three years with dividend growth of 20% per year during this period, but this would then slow down thereafter to 4% per year indefinitely. Based on your boss assumptions:

3. What is the current value of the share?