Jane Wu is employed as a senior investment adviser for a large stock-broking house. One of her major responsibilities is to advise clients on the composition of their portfolios. A client has expressed interest in shares of Oran Chemical Ltd. Jane determines that Oran’s ordinary shares are currently trading at $2.50; she also discovers that the company, which has a policy of paying dividends once a year, has just paid a dividend of 30 cents per share. Based on her analysis of the information available to her concerning the company’s operations and markets, Jane forms the opinion that dividends will grow 9 percent per annum for the following 3 years and then grow at a constant compound rate of 5 percent into the foreseeable future. She also feels that a required annual rate of return of 15 percent is commensurate with Oran’s risk.
(a) Calculate the value of the stock today.
(b) Calculate the value of the stock in one year’s time.
(c) Calculate the dividend yield and capital gains yield in the first year, and show how this relates to required rate of return?
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