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Calculate the current share price in each case

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Question - The required rate of return on the shares in the companies identified below is 8% pa. Calculate the current share price (ex-dividend) in each case.

(a) The current earnings per share of Alpha Ltd are $5.00. Earnings are expected to remain constant forever. For the next 5 years, Alpha anticipates having to put all of its earnings back into the business to maintain the level of earnings. After this it is expected that all earnings will be able to be paid out as dividends.

(b) Gamma Ltd is planning to reinvest earnings and not pay dividends until year 3, when a dividend of $8 is expected (D3 = $8). Dividends are expected to grow at 2% pa forever after that.

Reference no: EM132918269

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