Company X is considering to buy Company Y, which is currently in intensive investment phase and will not change its dividend policy for the next 4 years. A dividend of $2.00 was just paid by Company Y. After 4 years, Company Y will provide 30% annual dividend growth for 3 more years. After that, dividend is expected to grow at 2% growth per year forever. If the proper market capitalization rate for company of similar risk level should be 11% per year, what is the fair price of Company Y's share (to 2 decimal places)
a. Show your workings clearly.
b. Explain the result if the growth rate is equal to, or greater than the market rate of return. What is the market rate of return?
c. P/Es (Price Earning ratios) do not really indicate anything about a company. Why or why not ?

Answer rating: 100% (QA)

Solution a Workings Dividend in year 0 current 2 Years 14 dividend stays constant at 2 no growth as ... View the full answer