Question

a. Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends. b. Bella wants to purchase shares in newly listed

company at the London Stock Exchange but is ton between buying shares of ordinary equity or preference shares. (i) What is ordinary equity? List two features of ordinary equity. (ii) What is preference shares? List two features of preference shares. c. Plantaco Plc announced today that it will begin paying annual dividends next year. The first dividend will be £0.12 a share. The following dividends will be£0.15, £0.20, £0.50, and £0.60 a share annually for the following 4 years,respectively. After that, dividends are projected to increase by 5 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 9.2 percent? d. Last year, Angelos Plc paid an annual dividend of €2.50 per share. The company has been reducing the dividends by 7 percent annually. How much are you willing to pay to purchase stock in this company if your required rate of return is 9.6 percent? e. The next dividend payment by Cannonball AG will be €2.6 per share. The dividends are anticipated to maintain a 3.9 per cent growth rate forever. If the equity currently sells for €79.4 per share, what is the required return?

Fig: 1

Fig: 2

Fig: 3

Fig: 4

Fig: 5