Question

TSC, Inc. sells for $30 and pays an annual per share dividend of $2.30, which you expect to grow at 6 percent. What is your expected return on this stock? Round your answer to the two decimal places. % What would be the expected return if the price were $40 a share? Round your answer to the two decimal places. %

Answer 1

Given,

Current price = $30

Dividend = $2.30

Growth rate (g) = 6% or 0.06

Solution :-

Expected dividend = Dividend x (1 + g)

= $2.30 x (1 + 0.06)

= $2.30 x 1.06 = $2.438

Expected return = (Expected dividend/Current price) + g

= ($2.438/$30) + 0.06

= $0.0813 + 0.06 = 0.1413 or 14.13%

Now, if current price = $40,

Expected return = (Expected return/current price) + g

= ($2.438/$40) + 0.06

= 0.0610 + 0.06 = 0.1210 or 12.10%