Question 8

The required rate of return on the shares in the companies identified below is 9% pa. Calculate the current share price (ex-dividend) in each case.

(a) The current earnings per share of Alpha Ltd are $10.00. Earnings are expected to remain constant for the next three years. For the next 3 years, Alpha anticipates having to put half of its earnings back into the business to maintain the level of earnings. After this it is expected that all earnings will grow by 3% pa and all earnings will be able to be paid out as dividends.

(b) Gamma Ltd is planning to reinvest earnings and not pay dividends until year 4, when a dividend of $6 is expected (D4 = $6). Dividends are expected to remain constant after that.

(Accurate to the nearest cent)