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?
To calculate the value of a share in Company Q, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula for the Gordon Growth Model is:
Value of Share = Dividend / (Required Return - Dividend Growth Rate)
Let's plug in the given values:
Dividend = $1.40
Required Return = 10% (0.10)
Dividend Growth Rate = 5% (0.05)
Using the formula, we get:
Value of Share = $1.40 / (0.10 - 0.05)
Simplifying further, we have:
Value of Share = $1.40 / 0.05
Calculating this, we find:
Value of Share = $28
Therefore, the value of a share in Company Q is $28.