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Do you agree that the dividend growth model only works for a company with a dividend history? Explain your answers. (4 marks)

ii) MW Co. expects earnings of £1.25 per share next year, out of which £0.50 will be paid out as dividends. Earnings and dividend are expected to grow at a constant rate g each year afterwards. MW shares are now traded at £20. The cost of capital for MW Co. is 10°/o per annum. What is the expected growth rate g? (3 marks)

iii) Stock S is slowly recovering from several years of losses. After numerous reductions in previous years, the dividend was just £0.50 per share last year. The now-profitable company is expected to increase dividends by £0.50 per year for the next four years. Thereafter dividends are not expected to grow

or decline. The cost of capital is 9.5°/o per annum. How much is each stock

worth today? (6 marks)


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