Question
The IMG Entertainment Group has been witnessing good sales in the last few quarters of its operations. The firms upper management seriously believes that shareholders
The IMG Entertainment Group has been witnessing good sales in the last few quarters of its operations. The firms upper management seriously believes that shareholders should be rewarded. As a result, the firm is expected to increase dividends by 10% in one year and by another 12% in two years, and by another 15% in three years. After that, dividends will increase at a rate of 5% per year indefinitely.
(a) If the last dividend paid was $20 and the required return is 40%, how much IMG would be worth today using the Dividend Discount Model?
(b) Evaluate the impact on the firms value if the management decided to change the dividend growth rate in year 4 to 10% indefinitely.
(c) Recommend 3 alternative financial tools which a shareholder might apply when deciding whether or not to buy an ordinary share.
(d) What are some of the limitations of the Dividend Discount Model? Explain your answer.
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