a) Gandolf LTD (GL) is expected to pay its first dividend of $0.50 per share next year. The dividend is then expected to remain at $0.

a) Gandolf LTD (GL) is expected to pay its first dividend of $0.50 per share next year. The dividend is then expected to remain at $0.50 for a further 3 years( years 2, 3 ad 4) after which it is expected to grow at a constant 2.5% p.a. forever. Shareholder require a 12% p.a. return. Calculate the current value of a share in Gandolf Ltd.

b) An 8% preference share has a par value of $100 and has a current price of $40. Calculate the preference shareholders required rate of return.