Expected Return If a company's current stock price is $25.80 and it is likely to pay...

Expected Return If a company's current stock price is $25.80 and it is likely to pay a $1.55 dividend next year. Since analysts estimate the company will have a 12% growth rate, what is its expected return?

Expert Solution

Here, we will use the Gordon model formula of share price as per below:

Share price = D1 / k -g

where, D1 is next years' dividend =$1.55, k is expected return,Share price = $25.8 and g is the growth rate = 12%

Now, putting the values in the above formula, we get,

$25.8 = $1.55 / k - 12%

k - 12% = $1.55 / $25.8

k - 0.12 = 0.06007751937

k = 0.6007751937 + 0.12

k = 0.18 or 18%

So, required return is 18%.

jeff jeffy answered 2 years ago

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