Homework Help: Finance

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/r-g

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/(1-r)
=1.4/ .0454545...
=30.8

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