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HI JOHN,
Is it possible for a growth rate using dividend valuation model to exceed ke (cost of Equity)?.
I am lost and confused as I was attempting a question which asks for a prospective share price.
Ke using CAPM was 8.8%, however with a constant forecasted growth of 9%.
do =21cents
g=9%
Ke=8.8%I get
mv = do (1+g)
———–
ke-gmv = .21(1.09)/.088-.09)
mv =-114.45
please help.what am I doing wrong?.
thanks in advance
The growth rate will not be higher than the cost of equity (shareholders would demand a higher return if the growth rate were higher).
If you say which question you are referring to then I will find out where you are going wrong (if it is a past exam question, or a question from the BPP Revision Kit).
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