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Calculate the price of a share

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Reference no: EM133110280

One way to value a share of stock is the dividend growth, or growing perpetuity model. Consider the following: The dividend payout ratio is 1 minus b, where b is the retention or plowback ratio. So the dividend next year will be the earnings next year E1 x (1- retention %). The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we'll be able to calculate the price of a share today. What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

Reference no: EM133110280

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