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Publicly traded REITs have long been considered safe investments because they have steady revenue generation streams – property rents for equity REITs or debt service payments for mortgage REITs
Publicly traded REITs have long been considered safe investments because they have steady revenue generation streams – property rents for equity REITs or debt service payments for mortgage REITs. However, many REITs were forced to cut or suspend their dividend payments over the past year. Using the information from Q1, assume that Atlantis REIT completely suspended its dividend. In other words, it expects to pay $0 per share next fiscal year. The following year it expects to partially reinstate its dividend to $3.50 per share. Then in year 3, it expects to fully reinstate its dividend to $7.25 per share and to increase those dividends at about 3.0 percent per year in the future. Assume investors in REITS like Atlantis still require a return of 8.0 percent. a. (10 points) What value per share is indicated using a dividend discount model?
Expert Solution
D1=0
D2=3.50
D3=7.25
D4=D3*(1+growth rate)=7.25*(1+3%)=7.468
Terminal value at year3=D4/(required rate of return-growth rate)=7.468/(8%-3%)=149.35
Value Per Share=(D1/(1+8%))+(D2/(1+8%)^2)+((D3+Terminal value at year3)/(1+8%)^3)=0+(3.50/1.08^2)+((7.25+149.35)/1.08^3))=3+124.31=127.31
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