Question 6

You are an equity analyst working for an investment bank. You are analysing Company ABC shares. The last years dividend (Do) was 40 pence. You are predicting 10% dividend growth for next 3 years and 8 % for the following 2 years, and thereafter dividend growth is assumed to slow for the foreseeable future to 5%. The required rate of return on equity is deemed to be 12%.

i. Calculate the fair value price of the share. (Show your workings)

ii. What is the fair value of the share at the end of year 5? (Show your workings)