Posted by Teresa on Thursday, March 13, 2008 at 7:03pm.
Company Q has just paid a dividend of $1.40 per share. Its dividend is expected to grow at 5% per year perpetually. If the required return is 10%, what is the value of a share in Company Q?
What I know:
Current Div=1.40
Required rate of return=10%
Retention Ratio=90% ?
Growth rate=5%
I think this formula??
DIV/rg

Finance  Damon, Thursday, March 13, 2008 at 7:45pm
Finance not my thing but
If we are talking about forever, then all that matters is the value of the flow of dividends and your discount rate or required rate of return.
Vo = 1.40 + 1.40 (1.05/1.1) + 1.40 (1.05/1.1)^2 .... geometric series
g = 1.4
r = 1.05/1.1 = .954545...
sum of infinite geometric series = g/(1r)
=1.4/ .0454545...
=30.8