The XYZ-stock trading at the Oslo Stock Exchange just paid a dividend of 2.15 per share. Based on the market price of risk, a required rate of return of 15% on the stock is appropriate. The next dividend payment on the XYZ-stock will take place in exactly one year. Currently, 10 million common shares are outstanding (issued and traded) in the XYZ-corporation. Among market analysts, there is substantial disagreement over the XYZ-stock’s future growth prospects. Your investment advisor believes that the stock could shortly trade substantially above its current level, pending favorable news regarding earnings per share (EPS). Other analysts recommend the stock be priced based on only modest growth in dividend from its present level. Assume in the following that 15% is an appropriate required rate of return on the stock independent of future growth scenarios. Be sure to show your calculations when working out your answers to the questions below:
(a) Assuming 4% perpetual growth in dividends per share; what is the most likely market value per share?
(b) Assuming the XYZ-stock enjoys super-growth of 10% in dividends per share during the first five years and 4% in subsequent years thereafter; what market value per share is consistent with this scenario?
(c) Assume that the XYZ-stock with 50% probability will pay constant dividend, and with 50% probability the dividends will grow by 10%. What is a likely market value?