Question:

The Can't Hold Me Back Company is preparing to pay their first dividend. They are going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. You are required to:

(a) Calculate the value of the share if you require a 7% return. Show the relevant equations.

(b) Explain what type of model you used to value these shares and why?

(c) If the company decides after year three that their dividends will grow at a constant rate of 2% per year, what will you be prepared to pay for this share?

(d) Explain why there is a difference between what your prepared to pay in question (a) for the share, compared to question (c)?