When an investor expects to hold the equity share for one year, the price of the equity share will be
![Image 41](https://www.vskills.in/lms/wp-content/uploads/2016/06/Image-41-3.jpg)
Where
Po = current price of the equity share
D1 = dividend expected a year hence
P1 = price of the share expected a year hence
r = rate of return required on the equity share
Illustration:
Uranus Ltd.’s equity share is expected to provide a dividend of Rs. 2.00 and fetch a price of Rs.18.00 a year hence. What price would it sell for now if the investors’ required rate of return is 12%?
The current price will be
![Image 43](https://www.vskills.in/lms/wp-content/uploads/2016/06/Image-43-3.jpg)
If the price of the equity share is expected to grow at a rate of g per cent annually, the current price being Po becomes Po(1+g) a year hence and hence we get
![Image 44](https://www.vskills.in/lms/wp-content/uploads/2016/06/Image-44-2.jpg)
On simplifying, we get,
![Image 42](https://www.vskills.in/lms/wp-content/uploads/2016/06/Image-42-3.jpg)
Given the current market price and forecast values of dividend and share price, the expected rate of return is equal to
R= D1/Po + g