Suppose a firm’s stock is selling for $36.70. They just paid a $3.15 dividend and dividends...

Suppose a firm’s stock is selling for $36.70. They just paid a $3.15 dividend and dividends are expected to grow at 4% per year. What is the required return?

	A) 4%
	B) 8.748%
	C) 8.583%
	D) 12.583%
	E) 12.926%

Solutions

Expert Solution

Ans E) 12.926%

P0 =	Price of Share
D1 =	Current Dividend
Ke =	Cost of Equity
g =	growth rate

P0 =	D1 / (Ke - g)
36.70 =	3.276 / (Ke - 4%)
Ke - 4% =	3.276 / 36.70
Ke - 4% =	8.926%
Ke =	8.926% + 4%
Ke =	12.926%



D1 =	D0 ( 1 + g)
	3.15 * (1 + 4%)
	$3.2760

jeff jeffy answered 2 years ago

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