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Nesterboy [21]
3 years ago
13

Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-

end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends?
Business
1 answer:
steposvetlana [31]3 years ago
6 0

Answer:

The answer is: 10% constant growth rate

Explanation:

Since transportation stocks provide a 15% rate of return, TTT stock should also provide the same rate of return. We can expect to earn $9 (= $60 x 5%) every year from our investment in TTT stocks. We are receiving $3 as dividends, so the constant growth rate should equal the difference between the expected return minus the dividend payments:

  • $9 - $3 = $6; $6 represents 10% of the current stock price

We can also calculate this with the following formula:

expected return rate = (dividends / price) + growth rate

15% = (3 / 60) + g

15% = 5% + g

10% = g

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