The Dubai Ice Park LLC has been witnessing good sales in the
last few quarters of its operations. The firm’s upper management
seriously believes that shareholders should be rewarded. As a
result, the firm is expected to increase dividends by 3% in one
year and by another 12% in two years, and by another 20% in three
years. After that, dividends will increase at a rate of 6% per year
indefinitely.
(a) If the last dividend paid was $50 and the
required return is 25%, how much IMG would be worth today using the
Dividend Discount Model? [4 marks]
(b) Evaluate the impact on the firm’s value if the
management decided to change the dividend growth rate in year 4 to
10% indefinitely. [2 marks]
(c) Recommend 2 alternative financial tools which a
shareholder might use when deciding whether or not to buy a stock.
[2 marks]
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