Question

Ecolap Inc. (ECL) recently paid a $0.58 dividend. The dividend is expected to grow at a 17 percent rate. At a current stock price of $80.99.
A. What return are shareholders expecting? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Answer:

Expected rate of return will on the shareholder will be 17.83 %

Explanation:

We have given recent dividend $D_0=0.58$

Dividend is expected top grow at 17% rate

So g = 17%

So next year dividend $D_1=D_0(1+0.17)=0.58\times 1.17=0.6786$

Current stock price $P_0=80.99$

We have to find return to the shareholders $K_e$

We know that current price is given by

$P_0=\frac{D_1}{K_e-g}$

So $80.99=\frac{0.6786}{K_e-0.17}$

$80.99K_e-13.768=0.6786$

Ke = 0.1783 = 17.83%

So expected rate of return will on the shareholder will be 17.83 %