A share is expected to pay a dividend of $1.40 in one year. This dividend is...
A share is expected to pay a dividend of $1.40 in one year. This dividend is expected to increase at an annual rate of 5% forever. If the required return is 15%, what is the fair value of this share today?
Homework Answers
Using Gordon Growth Model
Po = D1 / (Ke – g)
Where,
Po – Current share price = ?
D1 – Next year expected dividend = 1.40
Ke – Required return = 15%
G – Growth rate in dividend = 5%
P0 = 1.4 / (.15-.05)
= 1.4/.1
Fair value of share today = $14.00
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