Question

A firm called "Slow Grower" is expected to pay it's shareholders a $1 dividend next quarter, and this dividend is expected to grow at a rate of 0.5% APR compounded quarterly. What is the share price if the required return on Slow Grower is 6% APR compounded quarterly?

A firm called "Slow Grower" is expected to pay it's shareholders a $1 dividend next quarter, and this dividend is expected to grow at a rate of 0.5% APR compounded quarterly. What is the share price if the required return on Slow Grower is 6% APR compounded quarterly?

Answer 1

share price = expected dividend next quarter/(required return - dividend growth rate)

dividend growth rate and required return are given in annual percentage rate but they compound quarterly. also expected dividend is quarterly. so we need to use quarterly dividend growth rate and required return.

quarterly dividend growth rate = APR dividend growth rate/no. of quarters in a year = 0.5%/4 = 0.125%

quarterly required return = 6%/4 = 1.5%

share price = $1/(0.015 - 0.00125‬) = $1/0.01375‬ = $72.73

the share price is $72.73 if the required return on Slow Grower is 6% APR compounded quarterly.