A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever.
A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever. What is the rate of return required by investors? Answer: 14.5%
Homework Answers
We can calculate the share price using the following formula:-
Share price= dividend for next year /Re-g
Where
Re = required rate of return by the investor
g = growth rate
When we apply the equation we can calculate Re from the equation
So, 40= 1 / Re-0.12
Re-0.12 = 1/40
Re-0.12 = 0.025
Re = 0.025+0.12
Re = 0.145 ie, 14.5%
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