What is the value of a share that has just paid a dividend of $1, growing at 5% and a required rate of return of 10%?
Question
What is the value of a share that has just paid a dividend of $1, growing at 5% and a required rate of return of 10%?
Solution
To calculate the value of a share that has just paid a dividend, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula is:
P = D / (r - g)
where: P = price of the stock D = dividend just paid r = required rate of return g = growth rate of the dividend
In this case, D = $1, r = 10% or 0.10, and g = 5% or 0.05.
Substituting these values into the formula, we get:
P = 1 / (0.10 - 0.05)
Solving this equation gives us:
P = 1 / 0.05
So, the value of the share is $20.
Similar Questions
What is the value of a share that has been paying $2 dividends with no growth prospects, and a required rate of return of 10%?
What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%?
A share just paid a dividend of $0.60. The dividend is expected to increase at an annual rate of 4% forever. If the required return is 10%, what is a fair value of this share today? Group of answer choices $11.00 $6.24 $0.62 $10.00 $10.40
The Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?
A company’s dividend is expected to grow at 20% for the next six years. After that, the growth is expected to be 3% forever. If the required return is 10%, what is the value of the stock at time 6? The dividend just paid was $1
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.