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The problem describes a stock that just paid a dividend and is expected to grow at a constant rate. To find the fair value of the stock today, we can use the **Gordon Growth Model (Dividend Discount Model)**:

\[
P_0 = \frac{D_1}{r - g}
\]

Where:
- $ P_0 $ is the fair value of the stock today.
- $ D_1 $ is the dividend expected in the next period.
- $ r $ is the required rate of return (10% or 0.10 in this case).
- $ g $ is the growth rate of the dividend (4% or 0.04 here).

Given:
- The most recent dividend ($ D_0 $) is $0.60.
- The dividend grows at a rate of 4% ($ g = 0.04 $).
- The required return is 10% ($ r = 0.10 $).

Since the Gordon Growth Model requires the next period's dividend ($ D_1 $), we need to calculate it as follows:

\[
D_1 = D_0 \times (1 + g) = 0.60 \times (1 + 0.04) = 0.60 \times 1.04 = 0.624
\]

Now, we use the formula to find the fair value of the share:

\[
P_0 = \frac{0.624}{0.10 - 0.04} = \frac{0.624}{0.06} = 10.40
\]

So, the fair value of the share today is **$10.40**.

### Would you like a more detailed explanation or have any questions?

Here are 5 related questions to further explore this topic:

1. How would the fair value change if the required rate of return increased to 12%?
2. What happens to the fair value if the growth rate is reduced to 2%?
3. How would the stock price change if the dividend was expected to grow at a non-constant rate?
4. What is the implication of a higher growth rate on the stock's fair value?
5. How does the Gordon Growth Model differ from other stock valuation models?

**Tip:** In the Gordon Growth Model, the growth rate $ g $ must be less than the required return $ r $ for the formula to be valid.

A share just paid a dividend of $0.60. The dividend is expected to increase at an annual rate of 4% forever. If the required return is 10%, what is a fair value of this share today?

Calculate the fair value of a share using the Gordon Growth Model. The share just paid a dividend of $0.60, expected to grow at 4% annually, with a required return of 10%. Learn the detailed steps involved in solving this finance problem.

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