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sir so we have this formula of dividend valuation which is written as: P0=D0(1+g)/(ke-g)
With regards to the aforementioned formula, I was wondering if ‘g’ is greater than ‘ke’ then what will happen to P0?And unlike my peers who claim that such a scenario is impossible in real world, i very well think it is possible. For example in an undervalued company, where the shareholders’ expected ‘Re(return on equity-which is same as ke)’ is less, because the company hasn’t paid any dividends fro quite a while as it has been too busy focussing on reinvesting its cash flows and growing the company. In such a company clearly the ‘g’ exceeds ‘Re or ke’!
Your thoughts on this sir?
Firstly it won’t happen in the exam 🙂
Secondly, in real life, the market value is the PV of future expected dividends discounted at the shareholders required rate of return. The formula applies when they are expecting dividends will grow in the future at an average rate of g per year. If they expect higher future growth they will require a higher return.
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