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?
What I know:
Required rate of return=10%
Retention Ratio=90% ?
I think this formula??
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)