Problem
Howell plc, a firm located in Glasgow, has recently launched a new product, which is proving to be very popular. As a result, the company is expanding its market into London and expecting rapid growth.
Howell plc has 1.5 million £1 authorised shares of which 1 million have been issued. Shareholders expect a return of 12% on their investment. A dividend of £800,000 has just been paid.
As a financial analyst, you have predicted the following three scenarios on future dividend growth for Howell plc's investors:
• The dividend is expected to experience zero growth, due to the failure of expansion into the new market.
• The dividend is expected to grow by 6.25% per annum for the foreseeable future.
• The company expects that this dividend will increase to £850,000 next year and continue to grow at this rate for the following four years (from year 2 to year 5). In year 6, it is expected that the growth rate will fall to 4% because of company investment plans.
Task
1. Calculate the share price assuming scenario (1) that the dividend is expected to experience zero growth.
2. Calculate the share price assuming scenario (2) that the dividend is expected to grow by 6.25% per annum for the foreseeable future.
3. Calculate the share price assuming scenario (3) holds.