Calculate valuation for qan shares today using mixed growth

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Reference no: EM133664237

Problem

Now that the pandemic and lockdowns are over, you think that people will travel again, and therefore you are thinking of buying shares in Qantas Limited (QAN). You expect QAN to pay dividends of $0.22, $0.26 and $0.32 over the next three years and then you believe dividends will grow at a rate of 6% a year. Assume the required return on equity for QAN is 11%.

1. Calculate the valuation for QAN shares today using the mixed growth dividend discount model (DDM). If the current market price for QAN shares is $5.41, should you buy them? Explain your answer.

2. Explain what would happen to your valuation if you:

a. Decreased your growth rate assumption for the QAN dividend.
b. Increased your required rate of return for QAN.

Reference no: EM133664237

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