Question

Mccracken​ roofing, inc., common stock paid a dividend of ​$1.161.16 per share last year. the company expects earnings and dividends to grow at a rate of 66​% per year for the foreseeable future.
a. what required rate of return for this stock would result in a price per share of ​$2222​?
b. if mccracken expects both earnings and dividends to grow at an annual rate of 1111​%, what required rate of return would result in a price per share of ​$2222​?

Answer 1

The solution for the problem is:

a.       Ks = D1 / P0 + g

= 1.16 x 1.06 / 22 + 0.06

= 1.2296/22 + 0.06

= 0.056 + 0.06

= 0.116 or 11.6% would be the required rate of return for this stock.

 

b.      Ks = 1.16 x (1.11) / 22 + .11

= 1.2876/22 + .11

= 0.059 + .11

= 0.169 or 16.9% would be the required rate of return if Mccracken expects both earnings and dividends to grow.