Question

The next dividend payment by Savitz, Inc., will be $2.08 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $42 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Required return for Savitz: 10.95%

Explanation:

Considering the gordon model we have to solve for the cost of capital (Ke)

$\frac{divends}{return-growth} = Intrinsic \: Value$

$\frac{divends}{Price} = return-growth$

$\frac{divends}{Price} + growth = return$

$Cost of Equity =\frac{D_1}{P)} +g$

D1 2.08

P 42

g 0.06

$Cost of Equity =\frac{2.08}{42} +0.06$

Ke 0.10952381

Answer 2

Answer:

11.21%

Explanation:

The value of the share can be calculated by the Dividend valuation formula, which as under:

r = D1 / Po      + g

By putting values we have:

r = $2.08 / ($42 - $2.08)Ex div share price + 6%

r = 11.21 %