An investor has invested in the shares of ABC Limited which expects no (zero) growth in dividends. ABC Ltd., has paid a dividend of Rs. 3 per share. If the required rate of return is 14%, what would be the value of the share ?
Rs. 21.43
With zero growth, the dividend is a constant perpetuity, so the share value is \(P_0 = \dfrac{D}{k_e}\).
Here \(D = 3\) and \(k_e = 0.14\), so \(P_0 = \dfrac{3}{0.14} = 21.4286\), that is about Rs. 21.43.
Check: a 14% return on Rs. 21.43 is \(0.14 \times 21.43 = 3.00\), exactly the dividend received each year.
Rs. 3 is only one year’s dividend, Rs. 14 restates the rate, and Rs. 4.66 does not satisfy the perpetuity relation.
Hence, Rs. 21.43.
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.................... is a client server application that identifies each host on the internet with a unique user-friendly name.
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