Cost of EQUITY: Constant GROWTH in dividends
• Where you expect that dividends will GROW at a CONSTANT rate each year (say, g), then the dividend you receive next year should be (1 + g) times as big as the one you just received:
68p, 73p, 74p, and 77p. What’s a fair price for the
share? (see Watson & Head p 291-2)
pence growth Divi’s:
Take an average annual growth over the 4 years,
• Shareholders require a 15% return on their shares and
a company has just paid a dividend of 80p/share. Over
the last 4 years the company has paid dividends of
d
P0
=
–––– KE
Example for YOU: X company has shareholders requiring a rate of return of 15% and is expected to pay a constant dividend of 30p per share through time. What is a share’s value?