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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%

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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.

This problem has been solved

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