MCY Mercury NZ ( MRP Mighty River Power)

[Jantar]

In a growth environment the valuation formula is D/(r-g) where D is the annual dividend, r is the required rate of return and g is the rate of growth in perpetuity of the dividend stream.

Your own calculations of growth imply quite a high growth rate. If we assume annual growth in dividends at a lower rate of say 1% p.a. then the valuation is:

23.11c / (0.045 -.01) = $6.60.

This is not too far off the current price so I suspect some players are pricing growth into their dividend valuation as per your earlier post on generation capacity.

Ferg, I have a problem with this method of valuation that perhaps you can explain. Using that formula, if the expected return is low, say 2%, and the sustained growth is equal to the required return, wouldn't that make the value of shares infinite? Or if the growth exceeds this, then the share value would actually be negative.