Current Market Price of Share Assignment | Homework For You

ABCo. has 3,000,000 shares issued and outstanding and are about to pay their

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annual dividend of $4.00. Investors require a 14 percent rate of return on these

equity sharesHomework For You


If ABCo. pays all of its earnings per year in dividends what is the current

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market price of ABCo. share?

(2 marks)


Rather than pay all the earnings out as dividends, the company will retain 25

percent of the earnings and the dividend they are about to pay will be $3.00.

This will result in an estimated growth of 3.5 percent. What will the

company share sell for in the market today?

(3 marks)


A new opportunity has just been received by ABCo. and the company needs

all of its earnings for the next 10 years. This will result in the company

suspending or not paying any dividends for the next 10 years. The next

dividend of $4.50 is expected to occur at the end of year 11 and dividends

are expected to grow at 4.0 percent forever. What will the company share

sell for in the market today?


Rather than accepting the opportunity presented in part c, ABCo. has found

another project that will result in the current dividend of $4 being paid;

however, dividends will grow by 10 percent for the next 5 years and then

grow at 3.5 percent forever after the 5 year period. What will the company

share sell for in the market today?

(6 marks)


Just when the company thought that all opportunities had been evaluated,

another opportunity has been presented. The new opportunity would see the

$4.00 dividend being paid; however, dividends will grow by 14 percent for

the next 5 years and then the growth will drop to 2 percent forever. What

will the company share sell for in the market today?

(6 marks)Homework For You


If your objective as the financial manager is to maximize shareholder wealth

and each of the above events are mutually exclusive, what would you

recommend to the management team? Explain why. Get Finance homework help today

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