Question

In: Finance

What would you estimate to be the required rate of return for equity investors


What would you estimate to be the required rate of return for equity investors if a stock sells for $40 and just paid a $4.40 dividend that is expected to grow at a constant rate of 5%?



7.6%



12.0%



16.5%



16.0%

Solutions

Expert Solution

Ans 16.5%

P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
40 = 4.62 / (Ke - 5%)
Ke - 5% = 4.62 / 40
Ke - 5% = 11.5%
Ke = 11.5% + 5%
Ke = 16.5%

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