Home Work

Course Name: Financial Markets & Institutions

Course Code: CB-604, Section: A
University of Dhaka
Mazharul Karim
ID: 51840042

Problem:

Uttara Finance Ltd. currently pays a dividend of Tk. 15 per share. Finance manager
expect the dividend will increase @10% annual rate over the next three years. At
the end of 3 year, dividend will continue to grow at a rate of5% forever. If the
rd

required rate of return is 15%, what is the price of share?

Solution:

We know, 
P0=D1/(1+k)+D2/(1+k)2+(D3+P3)/(1+k)3

Given,
D1=D0(1+g)
     =15(1+0.1)
     =16.50
D2=D1(1+g)
     =16.50(1+0.1)
     =18.15
D3=D2(1+g)
     =18.15(1+0.1)
     =19.97
D4=19.97(1.05)
     =20.46
P3=D4/(K-g)
    =20.96/(0.15-0.05)
    =209.60
P0=16.5/(1.15)1+18.15/(1.15)2+(19.97+209.6)/(1+0.15)3
    =179.02

Answer: Price of share sis Tk.179.02