This question is based on the following information:

You are trying to estimate the intrinsic value of the shares of Flying High Ltd, a manufacturer of unmanned aerial vehicles, or drones. The company is headquartered in Melbourne, and sells its drones throughout Australia and New Zealand. It is a public company, but is not yet listed on the stock exchange. There are 30,000 shares outstanding.

The firm pays an annual dividend. The most recent dividend was $2.33. The required rate of return is 14.2%.

Unfortunately the reduction in government regulation now means that there will competition from imported drones, which will reduce projected growth. You now conclude that the dividend will grow at 8% for the next 4 years and will then settle down to a constant growth rate of 2.1% in perpetuity. This means that the next 5 dividends will be as follows:

• Div₁: $2.52
• Div₂: $2.72
• Div₃: $2.94
• Div₄: $3.17
• Div₅: $3.24

The terminal value - the value of all dividends from Div₅ onwards, as at Year 4, will be $26.78.

What will be the value of the share under a 2-stage dividend discount model?

a.

$25.49

b.

$23.87

c.

$25.06

d.

$26.23