A company has been paying a $0.68 dividend and as it faces no growth opportunities it is expected that the dividend will not change in the future. If investors require a 24.98% return for this company, what is the share value. (Please round your answer to the nearest cent but exclude the $ sign when typing your answer.)
Question
A company has been paying a sign when typing your answer.)
Solution
The share value of a company that pays a constant dividend can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model). The formula is:
Share Value = Dividend / Required Return
Step 1: Identify the variables Dividend = $0.68 Required Return = 24.98% = 0.2498 (in decimal form)
Step 2: Substitute the variables into the formula Share Value = $0.68 / 0.2498
Step 3: Calculate the share value Share Value = $2.72
So, the share value of the company is approximately $2.72.
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