Question

A stock is currently priced at $76.48 per share. The stock paid its annual dividend of $4.32 per share last week. Dividends are expected to grow at a constant rate of 4.75 percent per year in perpetuity. Calculate the expected return on this stock. Group of answer choices 5.65% 5.92% 10.67% 10.40% 10.14%

Answer 1

Answer:

r = 0.10666841 or 10.666841% rounded off to 10.67%

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0* (1+g) / (r - g)

Where,

• D0 * (1+g) is dividend expected for the next period

• g is the growth rate

• r is the required rate of return  

By plugging in the available values for P0, D0 and g, we can calculate the value of r to be,

76.48 = 4.32 * (1+0.0475)/ (r - 0.0475)

76.48 * (r - 0.0475) = 4.5252

 

76.48r - 3.6328 = 4.5252

76.48r = 4.5252 + 3.6328

r = 8.158 / 76.48

r = 0.10666841 or 10.666841% rounded off to 10.67%

3.6 / 40 = g

g = 0.09 or 9%