You have been engaged to perform a valuation exercise for XYZ Ltd. You are provided with the following information:
Current dividend per share: $0.40 (100% unfranked)
Estimated cost of equity capital: 12% per annum
a) Using a Zero-growth model, what is your estimate of price? State any assumptions.
b) Now consider that growth is expected to be constant at 8% per annum indefinitely. What is your estimate of price?
c) Now assume that XYZ has the capacity to pay fully franked dividends at the corporate tax rate of 30%. What are your estimates of price under the assumption of zero growth and constant indefinite growth at 8% per annum?
d) Now assume that growth is expected to be constant at 8% per annum indefinitely, but fully franked dividends will not be paid until three years from now. That is, XYZ will pay unfranked dividends for the next two years. What is your estimate of price?
e) Discuss whether your answers from parts (a) to (d) are consistent with each other.