Valuation of Bonds and Shares

Assume Fortescue Corporation will pay an annual dividend of $0.50 one year from now. Analysts expect this dividend to grow at 10% per year thereafter until the fifth year. After then, growth will level off at 4% per year. The firms equity cost of capital is 6%. Use the dividend-discount model to answer the following questions.

1. What is the present value of the first five dividend payments? (4 marks)
2. What is the terminal price of Fortescue at time t=5? (3 marks)
3. What is the value of a share of Fortescue stock now? If the firms share price is currently trading at $20, will you sell or buy the shares? (3 marks)