Reference no: EM132493641

Point 1. Comwin Pty Ltd is expanding very fast and expects to grow at a rate of 25 per cent for the next 4 years. The company recently declared a dividend of $3.60 but does not expect to pay any dividends for the next 3 years. In year 4, they intend to pay a $5 dividend and thereafter grow it at a constant-growth rate of 6 per cent. The required rate of return on such shares is 20 per cent.

Question a. Calculate the present value of the dividends during the fast growth period.

Question b. What is the price of the share at the end of the fast growth period (P4)?

Question c. What is the share price today?

Question d. Would today's share price be driven by the length of time you intend to hold the share?

Point 2. Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next 3 years, its growth rates will be 30 per cent, 28 per cent, and 24 per cent, respectively. Last week it declared a dividend of $1.67. After 3 years the company expects a more stable growth rate of 8 per cent for the next several years. Your required rate of return is 14 per cent.

Question a. Calculate the dividends for the next 3 years, and find its present value.

Question b. Calculate the price of the share at the end of year 3 when the company settles to a constant growth rate.

Question c. What is the current price of the share?