Suppose you want to implement a market for a share with a flat fundamental value (P). Denote by E the per period expected dividend for this share and by R the market interest rate. Which of the following formula represents the correct expression for the flat fundamental value in this case?
A) P = R/E.
B) P = E/R.
C) P = E/{1+R}.
D) P = E*R.

Question

Quizplus · Accepted Answer

The correct expression for the flat fundamental value of a share, given a constant expected dividend (E) and a market interest rate (R), is P = E/R. This formula is derived from the dividend discount model for a perpetuity, where the value of the share is the present value of all future dividend payments, assuming those payments are constant over time and the market interest rate remains the same.

Suppose You Want to Implement a Market for a Share