Question

California Fishing Company (CFC) is expected to pay a dividend next year of $50 per share. Future Dividends for CFC are expected to grow at a rate of 5% per year indefinitely. If an investor is currently willing to pay $500 each CFC share, what is the investor’s required return for this investment?

Answer 1

Answer:

15% is the return of investment

Explanation:

The calculation is as follows:

Price of stock = Dividend to be paid next year / (Required rate of return – growth in dividend)

$500 = $50 / (Required rate of return - 5%)

500 × Required rate of return - (500 × 0.05) = 50

Required rate of return = 75/500 = 0.15

Thus, 15% is answer.