Question

If a stock has a required return of "r", its next dividend is expected to be "DIV1", and its dividends are expected to grow at a constant rate "g" thereafter, then its current share price "P0" can be determined by __________. P0=DIV1/(r-g) P0=DIV1 x (r-g) P0=P1/r P0=DIV1/r

Answer 1

Answer:

The correct formula is $P_0=\dfrac{DI V_1}{(r-g)}$

Step-by-step explanation:

$\text{Current share price}=\frac{\text{Estimated dividend for next month}}{\text{Required rate of return - constant growth rate}}$

Here,

Required rate = r,

Growth rate = g,

Estimated dividend for next month = $DIV_1$

Current share price = $P_0$

By substituting the values in the above formula,

$P_0=\dfrac{DI V_1}{(r-g)}$

Hence, the correct formula of current share is,

$P_0=\dfrac{DI V_1}{(r-g)}$