A company is expected to pay dividend of $6, $6, $6.50 over the next three years. A dividend of $7 is expected to be paid in the 4th year and in subsequent years it is anticipated that dividend will grow at 0.05%. If the required rate of return is 12%. Determine the value of the company's share. Will long term growth rate add value to the company if it is financed by retaining 30% of it's retained earnings.
Value of share
First discount the dividends using rate of 12%
Growth rate is 0.05%
D4 use the following formula:
Value of share = D1+D2+D3+D4
Value=5.357+4.783+4.627+41.72 = $ 56.49
Yes, long term growth rate will add value because retained earnings are a cheap source of capital and readily available for use.