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2 answers:
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Answer:
A)grow = 6.33%
Nxt year dividends(rounded to nearest cent): $4.31
B) The firm receives 93% (1 - flotation cost) of the market value of the shares so It receives the 42.06 per share
C) stock return 15.86%
D) required rate of return (with flotation): 16.57%
Explanation:
<u>We solve for the constant grow rate:</u>
grow= 0.063280262
<u>Dividends for the sixth year:</u>
4.05 x (1.0633) = 4,306365
42.06 / (1 - flotation cost) = 45.23
flotation cost = 1 - 42.06 / 45.23 = 0.07 = 7%
rate of return without flotation:
4.31/45.23 + 0.0633 = 0.158590736 = 15.86%
solving for return considering the existence of flotation cost:
D1 4.31
P 45.23
f 0.07
g 0.0633
Ke 0.165763157 = 16.57%
Answer:
A. 16.71%
Explanation:
Use dividend discount model (DDM) to solve this question.
Formula for finding the required return of a stock is;
r =
where P0 = Current price = $17.50
D1 = Next year's dividend = $3.45
r= required return = ?
g= growth rate = -3% or -0.03 as a decimal (negative sign is because dividend is expected to decrease)
r =
As a percentage , it becomes 16.71%