posted by Teresa
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?
The formula is:
P0 = sum( (DPS*(1+g)^t) / (1+r)^t)
where g is expected growth (.05), r is the required rate of return (.1), and t goes from 1 to infinity.
Unfortunately, my math skills have long since faded away; I am not confident in my ability to do infinite series.
But I cheated and used an excel spreadsheet. if t goes from 1 to inf, I get P0=29.4.