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A share is expected to pay a dividend of $1.40 in one year. This dividend is...

A share is expected to pay a dividend of $1.40 in one year. This dividend is expected to increase at an annual rate of 5% forever. If the required return is 15%, what is the fair value of this share today?

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Answer #1

Using Gordon Growth Model

Po = D1 / (Ke – g)

Where,

Po – Current share price = ?

D1 – Next year expected dividend = 1.40

Ke – Required return = 15%

G – Growth rate in dividend = 5%

P0 = 1.4 / (.15-.05)

= 1.4/.1

Fair value of share today = $14.00

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