Finance
posted by Teresa on .
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 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