Question

The stock of Canadian Ski Wear is currently trading at $45 a share and the company is expected to pay a dividend of $1.50 a share next year with an expected dividend growth rate of 4% per year. What is the expected return on the company’s common stock?

Answer 1

Answer:

The expected return on the company common stock is 4,03%

Explanation:  

We can use the dividend growth model to determine the expected return on the company's common stock.

The formula is as follows P = $D^{1}$ / ( k - g )

Where P = fair price of share ( current share price )

g = dividend growth rate (4%)

k = required rate of return

D = dividend expected in the following year ($1,50)

We need to solve for k and rearrange the formula to solve for K.

k  = D/p + g

k = 4,03%

If we substitute K into the original formula we also end up with P = 45 which is the current share price.