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shutvik [7]
3 years ago
9

A firm pays a $11.80 dividend at the end of year one (D1), has a stock price of $145, and a constant growth rate (g) of 4 percen

t. Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Business
1 answer:
lorasvet [3.4K]3 years ago
3 0

Answer:

The required rate of return is 12.13%

Explanation:

According to the DDM model, the formula for a price of a stock is

P=D1/R-G

D1= Year end dividend

P= Stock price

R= required rate of return

G= Growth rate of stock

SO we will input the values given to us in the question, in this formula.

145=11.80/(R-0.04)

145R - 5.8=11.80

145R= 17.6

R=17.6/145

R=0.121

R= 12.13%

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Answer:

8.67%

Explanation:

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Future value of reinvested coupons = FV(40, 20, 3.5%)

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N (No of coupons pending) = 10*2 = 20

Rate (Semi-annual YTM) = 9%/2 = 4.5%

Price of the bond after 10 years = PV(FV, PMT, N, RATE)

Price of the bond after 10 years = PV(1000, 40, 20, 4.5%)

Price of the bond after 10 years = $934.96

Total amount after 10 years = Future value of reinvested coupons + Price of the bond after 10 years

Total amount after 10 years = $1,131.19 + $934.96

Total amount after 10 years = $2,066.15

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Total Annual Return = [(Total amount after 10 years / Amount invested)^(1/holding period)] -1

Total Annual Return = [($2,066.15/$900)^(1/10)] -1

Total Annual Return = [2.295722^0.1] - 1

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To ascertain the unit of shares,see below:

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In each of these cases highlighted above share price is $10

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