g = 0.10 ( 1 - 0.70)
= 0.03
Gordon growth model: Price (at t = 0) = D1 / (r - g)
where D1 = D0(1 + g)
D1 = $4(1.03) = $4.12
P0 = $4.12 / (0.20 - 0.03)
= $24.24
ABC Incorporated just paid a dividend of $4 per share which represents 70% of its profit after tax. Its return
on shareholder's equity is expected to remain constant at 10% per annum for ever. If your discount rate is 20%
per annum, how much would you pay per share to buy ABC?
