Today is 30th June 2015. Justin Beamer Limited has distributable earnings of $6.00 per share. The company considers that it has a choice between:
i) Distribute these earnings as dividends, in which case it will be able to maintain this annual dividend payment ($6.00 per share) in perpetuity (forever)
(ii) or, alternatively, reducing the dividend payment now and over each of the next three years (30th June 2016, 2017, 2018) to $2.00 per share with re-investment into the firm of any additional distributable earnings. In which case, it considers that the firm will then be in a position to increase the dividend payout to $3.50 on 30th June 2019, with annual increases of dividend thereafter of 2% per annum.
Investors' required return on their shares in JB Limited is 12% per annum.
Required:
Calculate what you consider should be the market value of shares in JB Limited on 1st July (after it has paid the annual dividend for 2015) under each of the above scenarios (i) and (ii).