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A company has a constant growth of 4%, and a required rate of return of 18%. It has just paid a dividend of $2.50, what is the current share price valuatio

Question

A company has a constant growth of 4%, and a required rate of return of 18%. It has just paid a dividend of $2.50, what is the current share price valuatio

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Solution

The current share price valuation can be calculated using the Gordon Growth Model, which is a model 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 * (1 + g) / (k - g)

Where: P = price of the stock D = most recent dividend g = constant growth rate k = required rate of return

Given: D = $2.50 g = 4% or 0.04 k = 18% or 0.18

Substituting these values into the formula, we get:

P = 2.50 * (1 + 0.04) / (0.18 - 0.04)

P = 2.60 / 0.14

P = $18.57

Therefore, the current share price valuation is $18.57.

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