Shares in Calliope Ltd have been trading in the New York Stock Exchange (NYSE) for about...

 

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Shares in Calliope Ltd have been trading in the New York Stock Exchange (NYSE) for about 15 years. Its operations are based in the United States. It has a 15-year treasury bill that yields a current rate of 3 %. Its average excess historical annual return for U.S. stocks is 11% and beta is 1.9. It is priced to return 18.2%. Over time the company has experienced a successful growth rate in dividends of about 20% per annum. This growth has been achieved by diversifying into the export industry and extension in product development. It is expected that growth in the US sales will support the current growth in dividends for a further 2 years. After that time, it is expected for dividend growth to slow to about 10% per annum and the new growth rate to be maintained indefinitely. Dividends are paid every 6 months with the last payment made being 20 cents. Required: A. What is the shareholder's required return? B. What is the maximum price an investor is willing to pay at the required rate of return? C. Is the share fairly priced and is it advisable to purchase additional shares? Justify your answer with a graphical explanation. Shares in Calliope Ltd have been trading in the New York Stock Exchange (NYSE) for about 15 years. Its operations are based in the United States. It has a 15-year treasury bill that yields a current rate of 3 %. Its average excess historical annual return for U.S. stocks is 11% and beta is 1.9. It is priced to return 18.2%. Over time the company has experienced a successful growth rate in dividends of about 20% per annum. This growth has been achieved by diversifying into the export industry and extension in product development. It is expected that growth in the US sales will support the current growth in dividends for a further 2 years. After that time, it is expected for dividend growth to slow to about 10% per annum and the new growth rate to be maintained indefinitely. Dividends are paid every 6 months with the last payment made being 20 cents. Required: A. What is the shareholder's required return? B. What is the maximum price an investor is willing to pay at the required rate of return? C. Is the share fairly priced and is it advisable to purchase additional shares? Justify your answer with a graphical explanation.

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1 Shrehlders required rte f return It refers t the lest return ny given shrehlder will gree t ssessi... View the full answer