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Estimating the share price of an ordinary share

S

StevieG4captain

Member
It mentions the present value of future projected returns in the notes as a way of estimating the true value of a share.

How is this done in practice though, ordinary shares are irredeemable (ie something about perpetuity) unless the company participates in a share buyback of course??

Thanks
 
Hello

This is done by valuing an infinite stream of future dividend income - as you say, a perpetuity.

Happily, this converges provided the dividends are assumed to grow at a lower rate than the discount rate used to discount them back.

As the discount rate to use is the required rate of return on the share (which is made up of both income and capital growth) this should indeed be bigger than the dividend growth rate.
 
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