ACCA FM · Chapter 13 · Question 3 of 9
A company has just paid a dividend of $0.25 per share. Dividends are expected to grow at 4% a year indefinitely and shareholders require a return of 11%. Using the dividend valuation model, what is the value of one share (to the nearest cent)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $3.71
Explanation
P0 = D0(1 + g) / (Ke - g) = 0.25 x 1.04 / (0.11 - 0.04) = 0.26 / 0.07 = $3.71. Failing to grow the dividend to D1 gives $3.57.
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