Question

A firm just paid a dividend of $6 per share. Next year the dividend is expected to grow 8 percent, thereafter 10 percent forever. The present share price is $36. Calculate the required rate of return on the firm's equity. Express the response in decimal format

Answer 1

Answer:

26%

Explanation:

MV=Do(1+g)/(Ke-g)

Where MV is market value=$36

Do is current dividend per share=$6

g is growth rate=8%

Ke=?  

By putting above values we get;

36=6(1+.08)/(Ke-.08)

36Ke-2.88=6+.48

36Ke=2.88+6+.48

Ke=9.36/36

Ke=26%