Question

If the price of a share is going to be $15 in 2024, what information do you need to be able to calculate the share price of $15?  

How can the growth rate of a dividend and the required rate of return affect the share price.

Under perfect capital market, why do changing capital structures (proportion of debt and equity) not affect firm value?

Answer 1

If the price of a share is going to be $15 in 2024, what information do you need to be able to calculate the share price of $15?  

We need the information such as the dividend amount, the growth in dividend amount, and the cost of equity to calculate the share price using dividend discount model.

How can the growth rate of a dividend and the required rate of return affect the share price.

Price = D1/(r - g)

The growth of dividend is directly related to the share price. If the dividend growth rate increases, the share price increases and vice versa.

The required rate is inversely related to the share price. If the required rate increases, the share price decreases and vice versa.

Under perfect capital market, why do changing capital structures (proportion of debt and equity) not affect firm value?

This is because of the assumption that in a perfect capital market, there is no taxes and distress costs.