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%

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%

jeff jeffy answered 2 years ago

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