Constant Dividend Growth and Share Price

Constant Dividend Growth and Share Price

Share price can be calculated by from the by discounting future dividend. The following formula is used for discounting the future dividends.

Share Price = Do ( 1+g)        

                      Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Example

Current year dividend = .7

Dividend Growth Expectation = 6%

Cost of equity=12%

Solution

Share Price = Do ( 1+g)        

                      Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Share Price = .4(1+6%)

                     12%-6%

Share Price = .4(1+06)

                       .06

Share Price = 7.066