Question 4a and 4b (4 marks)

a) 2 marks

Find the present value of the following cash flow stream for a share

Dividends for the next four years will be $4.00, $4.00, $5.00, $5.00

After year four dividends will increase at a 3% rate forever

The markets required rate of return for this type of equity is 7%

Note: show your working. Marks are awarded for the process. If you have difficulty showing your working in the answer panel, you can upload an excel file or word doc.

b) 2 marks

Explain, in relation to an investor purchasing shares in a company, the principal/agent (moral hazard) problem.