Reference no: EM132615168

Question - It is 1 July 2015. Martins plc has gone through a period of retrenchment which has meant that for the last six years dividends have been held constant at 5p per share per annum. A dividend of 5p per share has been paid on the 30 June 2015. The market expects the annual dividends to remain at this level for the next three years (the next dividend is due in one year's time) and then to increase at a rate of 5% per annum thereafter. The cost of equity capital for Martins plc is 10% per annum. Later in the day, Martins plc announces a lucrative new partnership deal with Finlay plc which it expects will significantly affect future dividends. The market revises its expectations of future dividends as follows:

Expected dividend on 30 June 2016 0p

Expected dividend on 30 June 2017 7p

Expected dividend on 30 June 2018 10p

Expected dividend on 30 June 2019 10p

Expected dividends on 30 June 2020 will be 6% higher than the 2019 figure and growth of 6% per annum is expected from then on.

However, the market believes that the partnership increases the riskiness of Martins plc with the result that the cost of equity capital rises to 14%.

Use a dividend share valuation model to determine the impact of the new partnership on the current share price. (You will need to calculate the share price before and after the announcement)