Shengyuan Company has just paid a cash dividend of 20 cents per share. Investors require a...

Shengyuan Company has just paid a cash dividend of 20 cents per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady rate of 4% per year, what is the current value of the share? What will the share be worth in five years? Show working out.

P₀ = D₁/(r – g) = D₀ (1 + g)/(r – g)

Expert Solution

D0 = 0.20

R = 16%

G = 4%

P0 = 0.20 * (1 + 0.04) / (0.16 - 0.04)

= 0.2080 / 0.12

= 1.7333

Price at the end of 5 years = P0 * (1 + G)^5

= 1.7333 * (1 + 4%)^5

= $2.11

jeff jeffy answered 2 years ago

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