Eli owns one share of stock of Indigo River Media and one share of stock of...

Eli owns one share of stock of Indigo River Media and one share of stock of Red Royal Entertainment. The total value of his holdings is 174.83 dollars. Both stocks pay annual dividends that are expected to continue forever. The expected return for Indigo River Media stock is 15.8 percent and its annual dividend is expected to remain at 13.81 dollars forever. What is the expected return for Red Royal Entertainment stock if its next dividend is expected to be 7.99 dollars and all subsequent dividends are expected to grow by 3.16 percent annually? The next dividend for both firms’ stocks will be paid in one year. Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Expert Solution

Value of Indigo River Media stock = Dividend /expected return

= 13.81 /.158

= $ 87.41

value of Red Royal Entertainment =Value of total holdings- Value of Indigo River Media stock

= 174.83 -87.41

= $ 87.42

Expected return for Red Royal Entertainment =[D1/Price]+ g

=[7.99/87.42]+.0316

= .0914+.0316

= .1230

jeff jeffy answered 2 years ago

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