Question Three (5 Marks)

a) Shengyuan Company has just paid a cash dividend of 20 cents per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady rate of 4% per year, what is the current value of the share? What will the share be worth in five years? Show working out.

(2.5 Marks)

b) Drongo Corporation is considering an investment with a payback of five years and a cost of $12000. If the required return is 8%, what is the worst-case NPV? Explain. Show working out.

(2.5 Marks)