Calculate the fair value for the share

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Reference no: EM13907388

The current market price for shares in company ABC is 550 pence. Spot rates from the yield curve for year i are: r1 = 0.04 (4%); r2 = 0.05 (5%) rj = 0.06 (6%) (for j > 2) and the market risk premium (rp) on ABC shares is 4% (0.04) over the risk-free rate. Current dividends are 12 pence per share and at the end of years 1, 2 and 3 are expected to be 10 pence, 12 pence and 14 pence. If dividends are expected to grow at 5% per annum after year 3:, a. Calculate the fair value for the share b. Would you advise an investor to buy the share

Reference no: EM13907388

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