FINS Question (1 Viewer)

[Carl Gauss]

Hey BOS,

Can anyone help me out with this?

FBG Ltd Currently pays a dividend of $0.60 per share, which is 40% franked at the corporate tax rate of 30%. this franking rate is expected to last for one year, after which dividends will be fully franked. The forecasted growth of FBG is 10% in year one and a constant 4% per annum thereafter, indefinitely. If the cost of equity capital is 10% per annum, what is the value of one share in FBG?

Thanks

 

[Beaconite]

I don't know mate , sorry

 

[Trans4M]

Hi OP, is this for 1613?

It's been a sem since I did it but I think the dividend franking thing is a red herring. The price of a share is the sum of it's dividends. Since dividends are basically perpetuities we use the perpetuity formula.

I think to calculate this it's something like.

P = d1/r -g
D1 = 0.6 x 1.10
= 0.66
r = 10% (the required return or cost of equity)
g = 4% (constant growth rate)

therefore p = 0.66 / (0.1 - 0.04)
= $11.00

or it might actually be
p = 0.66/1.1 + [0.66 x 1.04/ (0.1 - 0.04)]/ (1.10)^1
= 0.6 + 15.60
= $16.20

I can't rememebr which method is correct sorry

Hopefully it might remind you of something so you can do it