Investor Perspective

Investor Perspective [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?