Reference no: EM133132816

Use the DDM model to analyze the effect of the interest rate on the valuation of shares. A small economy in an unknown place in the world has since the beginning of time (year 0) experienced 24 years of declining interest rates and they went from paying about 6% interest on 10-year government securities to to pay as little as 0% interest on 10-year government securities today. The interest rate has fallen gradually by 0.25% every year. Assume that the company Mark AB has had a risk premium that has been stable at 6% throughout period and that a dividend of SEK 10 per share was distributed in year 1. The dividend has since grown accordingly expectation of 2% per year, which is also the growth rate expected for all time to come. Assume that the interest rate on 10-year government securities is equal to the risk-free interest rate and calculate the required rate of return to ?? = ???? + risk premium.

i) Valuate Mark AB's share for each year from year 0 to year 24 using DDM (Formula (10) in the formula collection) and plot the value of the stock in a chart. Suppose one at each time has assumed that the prevailing interest rate will be forever.

ii) Evaluate Mark ABs under two hypothetical scenarios where the interest rate is instead in one the case is still at 2% throughout the period and in the second case is still at 6% throughout period. Plot the values ??according to the two different scenarios in the same diagram as above.