The following data relate to an all-equity financed company.
Dividend just paid
$180,000
Earnings retained and invested
60%
Return on investments
15%
Cost of equity
20%
What, according to the theory of share values, should be the market value of the company (to the nearest $1,000)?
The correct answer is: $1,784,000
The growth rate in dividends, g, is assumed to be the proportion of total earnings that are retained in the business for re-investing to produce higher profits and dividend growth, multiplied by the return on these re-investments, R. Thus g = bR.
Here g = 0.60 ´ 0.15 = 0.09
say $1,784,000
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