Question

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A stock will pay a dividend of $9 at the end of the year. It sells...

A stock will pay a dividend of $9 at the end of the year. It sells today for $101 and its dividends are expected grow at a rate of 10%. What is the implied rate of return on this stock? Enter in percent and round to two decimal places.

Expert Solution

Dividend discount model id used to find share price by discounting all the future dividend from the stock.

Share price = Next year dividend/ (Required return - dividend growth rate)

Where,

Share price = $101

Dividend = $9

Dividend growth rate = 10%

Let’s put all the values in the formula to find required rate

101 = 9/ (X - 0.1)

101*X - 10.1 = 9

101*X = 9 + 10.1

101*X = 19.1

X = 19.1/ 101

X = 0.18911

So required rate of the stock is 18.91%

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jeff jeffy answered 2 years ago

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