Hurricane Corporation expects to grow its dividend by 5% per year. The current dividend is $2 per share. The required return is 8%.

What is the estimated value of a share of common stock?
If price is $40 and dividends were $1.50 per share but expected to grow at 4% per year, what would be the required rate of return?

Expert Solution

Data:	Dividend Growth (g)	5%
	Dividend per Share	$2.00
	Required Return (r )	8%

A) Estimated Value of Common Stock = (Dividend X (1+ g))/(r-g)

= ($2*(1+5%))/(8%-5%)

= $70.00

B) Required Rate of Return

Price $40.00

Dividend $1.50

Growth rate 4%

Required Rate of return = ((Dividend *(1+g))/(P+g)

= (1.5*(1+0.04)/(40+0.04)

= 7.90%

7.90%

Junaid answered 2 years ago

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