Dividend Growth and Share Price
If Dividend
is growing with constant rate then share price can be calculated with following
equation.
Share price = Do (1+g)/K-g
Do=Dividend today
g= Constant Growth Rate of
Dividend
K=Cost of Equity
Example of Dividend Growth and Share Price
Dividend
|
$ 5
|
Growth Rate
|
15%
|
Cost of Equity
|
18%
|
Calculate the share price
Solution
Share price = Do (1+g)/K-g
=$ 5(1.15)/.18-15
=$5.75/.03
=$ 191.667
It is important to
remember that growth rate and share price has direct relationship i.e. high
growth rate will result in high share price and this relationship is very much rational
and logical.
