Problem: ABC pays dividends over the next 4 years: 2.50; 3.20; 4.75; and 5.20 beginning in period 1
1. After the 4th year the firm projects constant growth of 3%. Assuming investors need an 11% return, what is the current share price?
2. The CFO has proposed new investment opportunities and needs to present them to the board for approval. To be viable, dividends need to stay at $2.50 per year over the next 4 years. After the 4th year the growth rate would be 10%. Because of the increased risk, the board is seeking a 15% return on investment. Should they approve the investment strategy?