A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever.

A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever. What is the rate of return required by investors?

Answer: 14.5%

Solutions

Expert Solution

price of the stock = next dividend / (required return - growth rate)

here,

price of the stock =$40.

next dividend =$1

required return = to be found out , let it be x.

growth rate = 12%

=>0.12.

$40 = $1 / (x-0.12)

=>x-0.12 = $1/40

=>x=0.145

=>14.5%.

So required return = 14.5%.

jeff jeffy answered 2 years ago

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