What is the value of a share that has just paid a dividend of $1, growing at 5% and a required rate of return of 10%
Question
What is the value of a share that has just paid a dividend of $1, growing at 5% and a required rate of return of 10?
Solution
The value of a share that has just paid a dividend can be calculated using the Gordon Growth Model. This model is used to determine the intrinsic value of a stock, excluding external factors such as market conditions.
The formula for the Gordon Growth Model is:
P = D / (r - g)
where: P = price of the stock D = dividend just paid r = required rate of return g = growth rate of dividends
In this case, the values are: D = $1 r = 10% or 0.10 g = 5% or 0.05
Substituting these values into the formula gives:
P = 1 / (0.10 - 0.05)
Solving this equation gives:
P = 1 / 0.05
So, the value of the share is $20.
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