a. Consider a fictional company ABC plc, which paid the following dividends per share in the past
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Question:
- a. Consider a fictional company ABC plc, which paid the following dividends per share in the past as shown in Table 4.
Table 4 ABC plc dividends per share
Dividend per share (£) | ||||
4 years ago | 3 years ago | 2 years ago | 1 year ago | This year |
1.3 | 1.4 | 1.6 | 1.6 | 1.7 |
- The company has a beta of β=1.8, the market risk premium is (E(Rm)-Rf) = 6% and the risk-free rate of interest is Rf=0.5%.
- i. What is the fundamental value of ABC stock according to the Gordon growth model? In your calculations assume that the future dividends growth rate will be equal to the historical one.
- ii. What are the weaknesses of the Gordon growth model?
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