Say a share price grows at 12% and discounted by 10% i.e. current share price*(1.12)^4*(1.10)^-4. How does 12% relate to the 10%? Is there any relationship?
If we were using that formula to value shares, we'd need to assume a discount rate smaller than the assumed growth rate. We'd probably do this anyway, as the discunt rate would reflect our required rate of return on the share (so might reflect both growth & income). PS I don't think this is too important for ST2 Lynn
My confusion lies in the idea that shareholders require a higher discount rate (to compensate for risk) in order to pay a lower share price. Please advise.
Not sure I'm understanding your confusion (sorry!). Hope this helps: If I consider a stream of possible future dividends, the more risky I think they are, then the higher discount rate I'd use & so the less I'd be prepared to pay to buy the share.
