Amal is a second year undergraduate who is interested in investing in the stock market. With the advice of his stock broker, Amal is planning to buy some ordinary shares of Randix PLC that paid a dividend of Rs.3.00 per share yesterday. The dividend is expected to grow at a rate of 10% p.a. for the next two years and 5% p.a. thereafter. If he buys the stock, he plans to hold it for two years and then sell it.

You are required to;

 i. Estimate the expected dividend for each of the next two years.

 ii. Estimate the value of the share, if the relevant discount rate is 15% p.a. and the first dividend payment occurs 1 year from today.

 iii. Comment whether he should buy the shares of this company or not, if the prevailing market price is Rs. 41.25.   

Answer rating: 100% (QA)

i To estimate the expected dividend for each of the next two years we need to apply the given growth rate of 10 pa for the first two years and 5 pa th... View the full answer