Question 4 :

Duet Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for the next three years and then level off to 5% per year forever. The appropriate market capitalization rate is 20% per year for a typical company in the industry.

a. Explain and calculate the intrinsic value of a share of the company. (8 marks)

b. If the market price of a share of the company is equal to this intrinsic value, what is the expected dividend yield from the company ? (3 marks)

c. What do you expect its price to be one year from now ? (6 marks)

d. Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate ? (3 marks)