250FIN-R Question 3 a. Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends. [5 marks] b. Discuss three weaknesses of the dividend growth model (DGM) as a way of valuing the shares of a company. [9 marks] c. Belamax Plc just paid a dividend of 0.57 on its equity. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 15 percent return on the equity for the first three years, a 12 percent return for the next three years, and a 10 percent return thereafter. [6 marks) d. Johnbest Plc is a pharmaceutical firm. The company just paid a 20.5 dividend, but management expects to reduce the payout by 5.5 percent per year indefinitely. If you require a 17 percent return on this equity, what will you pay for a share today? [4 marks] e. Caplex Corporation just paid a dividend of 2.75 per share. The dividends are expected to grow at 21 percent for the next eight years and then level off to a 8 percent growth rate indefinitely. If the required return is 14 percent, what is the share price today? [6 marks) [Total 30 marks]