Assume that for the past 10 years the growth rate in A Ltd's dividends per share has been 10% p.a.Also assume that this growth rate is to be maintained indefinitely.The latest dividend of 90 cents was paid yesterday.What is the value of A's shares?
A)$18.00
B)$6.60
C)$19.80
D)$3.96

Question

Quizplus · Accepted Answer

The formula to calculate the value of a stock using the constant growth model is:

P = D / (r - g)

Where, 
P = Price of the stock
D = Dividend per share
r = Required rate of return
g = Growth rate of dividends

Using the given information, we can calculate the required rate of return (r) as follows:

r = 10% + 3% (expected inflation rate) 
r = 13%

Now, we can use the formula to calculate the price of the stock (P):

P = 0.90 / (0.13 - 0.10)
P = $19.80

Therefore, the value of A's shares is $19.80. Option C is the correct answer.

Assume That for the Past 10 Years the Growth Rate