Reference no: EM133056398
Banana plc is a new firm planning to have an Initial Public Offering prior to the launch of the second-generation iPhone. Four analysts are trying to determine a price for Banana plc shares, but they have different views of the likely dividend pattern over the coming months. The expectations of the four analysts are as follows:
i.Analyst 1 believes Banana will not pay any dividends for the next ten years, but 11 years from now they will pay a dividend of £0.311 per share. They then believe that Banana will increase dividends by 5% per year from then on.
ii.Analyst 2 believes Banana will not pay any dividends for the next twenty years, but 21 years from now they will pay a dividend of £0.552 per share. They then believe that because Banana has invested in more new projects they will increase dividends by 6% per year from then on.
iii.Analyst 3 believes Banana will not pay any dividends for the next thirty years, but 31 years from now they will pay a dividend of £0.871 per share. They then believe that because Banana has invested in even more new projects they will increase dividends by 7% per year from then on.
iv.Analyst 4 believes Banana will not pay a regular dividends for the next twenty years, but 21 years from now they will pay a dividend of £0.545 per share. In addition they believe that a one-off payment of £0.465 will be paid to shareholders (either in the form of a dividend or in the form of a share repurchase scheme) after 10 years. They believe that because Banana has invested in more new projects than Analyst 1 expects, but has made a cash payment to shareholders after 10 years, unlike the beliefs of Analyst 2, they will increase dividends by 5.85% per year from year 21 onwards.
All four analysts believe that given the nature of the business the cost of equity capital for Banana plc is 9%.
Calculate the expected price of Banana plc based on each of the analyst's expectations and comment on your findings.
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