Calculate the value of one share in clarence ltd

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Reference no: EM132985781

Question: Sam has cash to invest and is considering purchasing ordinary shares in Clarence Ltd. The company just paid a dividend of $1.00 per share to its shareholders. The dividend is expected to grow at the rate of 5% per year indefinitely.

Sam's required rate of return from this investment is 20% per annum.

Shares in Clarence Ltd are current selling for $5.80.

(a) Calculate the value of one share in Clarence Ltd.

(b) Sam is very keen to buy the shares in Clarence Ltd. Would you recommend this investment? Explain why or why not.

(c) Assume Sam buys the shares for $6.00 then immediately after buying the shares the company announces a bonus issue. As a result of the bonus issue (and assuming no value relevant information is released) explain what happens to the share price and the value of Sam's investment in Clarence Ltd.

Reference no: EM132985781

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