PRE Ltd has increased its dividend each year of its life by 4% p

Finance Sep 15, 2020

PRE Ltd has increased its dividend each year of its life by 4% p.a. and is expected to continue doing so into the foreseeable future. Yesterday, the company paid a dividend of $2.00 and the required return on its shares has been 8%. The dollar amount by which its current share price will change if the required return on its shares rises to 10% is closest to:

Group of answer choices

–$16.67.

+$16.67.

–$17.33.

+$17.33.

Expert Solution

Share price value=Dividend next year/(required return-growth rate)

1. Share price value if required rate is 8%=(2*(1+4%))/(8%-4%)=2.08/4%=$52

2. If required rate is 10%, then share value=2.08/(10%-4%)=2.08/6%=$34.67

The share calue will fall by=$34.67-$52=-$17.33

Option C is correct

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