Question

Von Bora Corporation (VBC) is expected to pay a £3.00 dividend at the end of this year. If you expect VBC" dividend to grow by 6% per year forever and VBC's cost of equity capital to be 13%, then the share price of VBS is closet to £42.86 15.79 E25.72 £17.14

Answer 1

The share price of VBC is closest to £42.86.

Step-by-step explanation:

To calculate the share price of VBC, we can use the Gordon Growth Model, which is given by:

Share Price = Dividend / (Cost of Equity - Dividend Growth Rate)

Substituting the given values:

Dividend = £3.00, Cost of Equity = 13%, Dividend Growth Rate = 6%

So, Share Price = £3.00 / (0.13 - 0.06) = £42.86

Therefore, the closest share price of VBC is £42.86.

Answer 2

To calculate the share price for Babble, Inc., we apply the DDM, considering the present value of expected future dividends at a 15% interest rate. After adding the present values for each year's dividend and dividing by the number of shares, we find that the expected share price is approximately $256,500.

Step-by-step explanation:

The student's question revolves around the calculation of a company's share price based on its expected dividend growth and cost of equity. The scenario provided, for the sake of explanation, deals with Babble, Inc., which plans to cease operations in two years, paying out its profits as dividends. To determine the share price an investor might pay for this company, dividend discount model (DDM) concepts are applied, taking into account the present value (PV) of expected dividends. This includes calculating the present value for each year, considering a 15% interest rate, and summing these to get the final value. By dividing this sum by the number of shares (200 in this case), we determine the price per share.

Calculation Method

We calculate the present value of future dividends using the formula PV = D /
`(1 + r)^(n)`, where D is the dividend, r is the discount or interest rate, and n is the number of periods. For Babble, Inc., we will have three dividends, one immediate and the following over the next two years. After finding the PV for each, we sum them up and divide by the number of shares.

Expected Share Price

After conducting the present value calculations for the upcoming dividends and accounting for the interest rate, the price an investor is likely to pay for a share of Babble, Inc. is approximately $256,500 per share.