Question 2 You are evaluating the potential purchase of shares in National Buildings Ltd. The firm currently paid a dividend of $4.20 per share. Your required rate of return on similar risk investment opportunities is 15%. Because you are relatively uncertain about future cash flows you decided to estimate the firm’s share value using several possible assumptions about the growth rate of cash flows.
Required:
A. What is the value of the firm’s share if the dividends are expected to grow at an annual rate of 0% indefinitely?
B. What is the value of the firm’s share if the dividends are expected to grow at an annual rate of 8% indefinitely? Under this assumption what will the stock be worth in five (5) years’ time
c What is the value of the firm’s share if the dividends are expected to grow at an annual rate of 12% for the first two years, followed by a constant annual rate of 7% from year three (3) indefinitely?
D. Determine the dividend yield and the capital gains yield for year 3 and the return on the stock
