Gamma Ltd is not expecting to pay dividends for three years, at the end of year four, a dividend of $2.45 is planned and dividends are expected to be constant forever after that. The required rate of return for Gamma Ltd equity is j4 = 12.25% pa. What is the expected price (-dividend) of Gamma Ltd’s shares at the beginning of year eight? Explain your logic.

To find the expected price of Gamma Ltd's shares at the beginning of year eight, we need to calculate the present value of all the future dividends and the future selling price of the shares at year eight.

Here's how we can do it step by step:

1. Calculate the present value of the dividend in year four:
Dividend in year four = $2.45
Required rate of return = 12.25% = 0.1225
Present value of dividend in year four = Dividend in year four / (1 + Required rate of return)^4

2. Calculate the present value of the dividends from year five to year seven:
Dividends from year five to year seven = $2.45 (since it is expected to be constant forever)
Present value of dividends from year five to year seven = Dividends from year five to year seven / Required rate of return

3. Calculate the present value of the expected selling price at year eight:
Since the dividends beyond year seven are expected to be constant forever, we can use the constant dividend growth rate formula:
Expected selling price at year eight = Dividend in year eight / (Required rate of return - Dividend growth rate)
Dividend growth rate = 0% (since the dividends are expected to be constant)
Present value of expected selling price at year eight = Expected selling price at year eight / (1 + Required rate of return)^8

4. Calculate the total present value of all future cash flows:
Total present value = Present value of dividend in year four + Present value of dividends from year five to year seven + Present value of expected selling price at year eight

5. Finally, calculate the expected price of the shares at the beginning of year eight:
Expected price (-dividend) = Total present value + Dividend in year eight

By following this calculation process, you can find the expected price of Gamma Ltd's shares at the beginning of year eight.