(a) Stant has just announced an ordinary dividend per share of 20p. The past four years' dividends per share have been 13p, 14p, 17p and 18p (most recent dividend last) and shareholders require a return of 14 per cent. What is a fair price for Stant's shares?
(b) Stant now decides to increase its debt level, thereby increasing the financial risk associated with its equity shares. As a consequence, Stant's shareholders increase their required rate of return to 15.4 per cent. Calculate a new price for Stant's shares.
(c) Outline any problems with using the dividend growth model as a way of valuing shares.