Reference no: EM132940976
Question - Frodo Baggins, who recently graduated from Hobbiton University, is considering making an investment in companies listed on the London Stock Exchange. After much deliberation, he decides to invest in three companies namely:
Orange Plc, Doogle plc, and Nikola Plc. He collects following information about each company: Orange plc: The company has historically paid a constant dividend of £2.5 each year and it is expected that they will continue paying the same dividend for a foreseeable future.
Doogle plc: The company has recently paid a dividend of £1.61. In the past, it had paid dividends of £1.00, £1.24, £1.35, £1.5, and £1.55 (last year).
Nikola plc: The company has recently paid a dividend of 75p and Frodo expects the dividend to grow at a rate of 10% per year for the next 4 years and then grow at a constant rate of 4% per year in the foreseeable future. Frodo believes that the real cost of equity capital for all the companies would be 12.745% and the prevailing general inflation rate would be 2% per year.
i. Calculate the value of one share for each company.
ii. Explain why Frodo should estimate value of the shares of these companies.
iii. Explain any two alternatives to cash dividends as a way of returning value to shareholders.
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