a share of $7 and a dividend paid with $2 per share. the retained earnings are reinvested in new projects with a yield of 24%. how much is the value of current share with a required yield of 25%?
Your question is rather unrealistic in the sense that a $7 share earns a dividend of $2 per share!!!.
Because $2/$7=~29%!!. Most dividends paid are in the 2-5% range!.
At any rate, if the dividend is re-invested @ 24%, then in 1 year the dividend becomes:
$2 x 1.24 =$2.48. In order for the stock to yield 25%, the price(P) of the share would have to be:
P x 25% =$2.48 divide both sides by 25%
P=$2.48 / .25
P=$9.92 The price of 1 share.
