A share just paid a dividend of $0

Finance Sep 12, 2020

A share just paid a dividend of $0.30. The dividend is expected to increase at an annual rate of 4% forever. If the required return is 10%, what is a fair value of this share today?

a.$0.31

b.$3.12

c.$5.20

d.$5.50

e.$5.00

Expert Solution

D1= D0* (1+ growth rate)

= 0.30* (1+0.04)

= $0.312

Price= D1/ (required return-growth rate)

= 0.312/(0.10-0.04)

= 0.312/0.06

= $5.20

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