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Hi tutor, I am bit confused about example 6 (question c). I don’t quite understand why the share growth rate is equal to the dividend growth rate. Are there any assumptions made before we arrive at that conclusion?
Thanks for your help!
We assume as always that the market value of shares is the present value of the future dividends.
If the dividends are growing at (say) 5% a year, the in a years time all the future dividends will be higher by 5% then they are now. So the PV of those future dividends in a years time will be 5% higher than it is now 🙂
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