Question

2. You have just completed an analysis of Rodriguez Manufacturing. You used the Capital Asset Pricing Model to determine that the required rate of return is 13%. The last dividend paid was $1.80, and the current price is $25. Based on new manufacturing processes that the company recently adopted and the company’s history of consistently paying dividends, you believe the company’s dividends will grow at a constant growth rate of 6%.

Answer 1

Answer:

You didn´t post the question complete. So I found the expected rate of return. Hope be useful.

Explanation:

Required rate of return on stock = 13%

Expected rate of return is calcualted below Using DDM model:

Expected rate of return = [$1.80 × (1 + 6%) / ($25)] + 6%

= ($1.908 / $25) + 6%

= 7.632% + 6%

= 13.632%

Expected rate of return is 13.632%.