Answer:
r= 16%
Explanation:
The Common Stock Valuation method is also simply referred to as the Value of the Stock Method and it is calculated taking different items such as growth rate of dividend, the dividend itself and number of periods into consideration
FIrst, we identify the formula of rate of return where dividend inceases constantly and at a compound rate
P0 = Div1/ r-g
Where Po is the price of the stock, Div1 is the next year's dividend, r is the rate of return and g is the growth rate of teh dividend
Secondly, we look at the growth rate with thereinvestment of 40% stock and a rate of return on reinvestmetn of 15% according to the question
Growth rate = r x e, where r is the rate of return and e is the reinvestment earning
Growth rate = 0.15 x 0.40 = 0.6
Finally, we calculate The rate of return or the discount rate using the first formula
P0 = Div1/ r-g
$40 = $4/r-0.06
r = ($4/$40) + 0.06
r= 16% or 0.16
