Dividend cash flow

Quantitative Finance Level 1

You want to value stock dividends that are projected to grow forever at a constant rate $g$ , using a discount rate of $r$ . If the dividend in the first period is $D$ , what is the value of this cash flow?

Assume that $r > g$ .

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\frac{ D } { r - g }

\frac{ D } { r + g }

\frac{ D } { g - r }

5 solutions

Jesus Ulises Avelar
Feb 19, 2015

helpful indeed

Mostakim Shakil - 5 years, 5 months ago

Hector Stylianos
Mar 16, 2018

Mere logic.

It's not option 2, cause then the value would be negative, nor Option 4, cause then the growth rate got bigger, the value would get smaller, which goes against logic. Also, it's not Option 1, cause different from one another r,g are expected to lead in differeny value than the initial dividend, so the only remaining (and seemingly logical) Option is 3.

Yes, that's how I did it.

Félix Pérez Haoñie - 1 year, 8 months ago

Marius Hauge
Mar 2, 2016

One should emphasize that the D here is the next dividend,

If not, then it should be D* (1+g) / ( r-g )

Thanks. I've rephrased the problem to indicate that the dividend is in the first period.

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Calvin Lin Staff - 5 years, 3 months ago

you should also specify that the growth is forever

Luiz Felipe Guimaraes - 4 years, 7 months ago

Thanks. Added it in.

Calvin Lin Staff - 4 years, 7 months ago

Patrick B
Jan 23, 2016

D=$10.00 g=5% r=8%

after 1 year value of D=$9.70 (D/r-g)

you mean 1+(r-g)

Nick Fleming - 2 years, 3 months ago

Ryan Stewart
Mar 9, 2018

subtract the discount from the growth rate and divide by this number.

Dividend cash flow

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