[10 marks]
a) You are trying to value Rio Tinto shares today. You decide to use the dividend paid in March
2014 by Rio Tinto as Do and assume that this will be the only dividend paid in the current
year. You also estimate that for the next three years dividends will grow at the same rate
which dividends increased by from August 2013 to March 2014. After this (starting in time 4)
you estimate dividends will grow at a constant rate of 12% forever. Assume that today the
risk free rate is 3%, the expected return to the market is 15% and Rio Tinto’s beta is 1. What
is the price of a Rio Tinto share today? Based on this price would you purchase the share?