Question

(Common stock valuation) Bates Inc. pays a dividend of $1.50 and is currently selling for $37.30. If investors require a return of 15 percent on their investment from buying Bates stock, what growth rate would Bates Inc. have to provide the investors?

The growth rate Bates Inc. would have to provide the investors is ______%. (Round to two decimal places.)

Answer 1

P0 = D0(1 + g) / (r - g)

37.30 = 1.50(1 + g) / (0.15 - g)

37.30(0.15 - g) = 1.50(1 + g)

5.595 - 37.30g = 1.50 + 1.50g

5.595 - 1.50 = 1.50g + 37.30g

4.095 = 38.80g

g = 4.095 / 38.80

g = 0.1055 or 10.55%