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Constant dividend growth model

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Reference no: EM133117053

The following is known of the company AB Finance:

  • The current price per share is 86.4 SEK, which corresponds to the value given by the Constant Dividend Growth Model
  • Yesterday the company paid a dividend of 4 SEK per share
  • The dividend is expected to have a constant growth of 8 % per year
  • The risk-free rate is 4 %, and the market risk premium is 5.5 %.

The management is considering a reduction in the dividend next year in order to enable the company to invest more and enhance growth of the company. The dividend next year will then according to their plan be 3 SEK/share, but the growth in dividends is increased to 10 % annually. What will be the new share price, assuming that we still have the same equity cost of capital?

Reference no: EM133117053

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