Question

You've collected the following information from yoour favorite financial website. 52-Week Price Div PE Close Net Stock (Div) Yld % Chg Hi Lo Ratio Price 64.60 47.80 Abbott 1.12 1.9 235.6 62.91 -05 Ralph Lauren 2.50 1,8 145.94 70.28 70.9 139.71 62 171.13 139.13 IBM 6.30 4.3 23.8 145.39 19 Duke Energy 3.56 91.80 17,6 71.96 4.9 74.30 84 96.20 113.19 Disney 1.68 1.7 15.5 ?? 10 a. Using the dividend yield, calculate the closing price for Walt Disney on this day. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assume the actual closing price for Walt Disney was $108.85. Your research projects a 4 percent dividend growth rate for Walt Disney. What is the required return for the stock using the dividend discount model and the actual stock price? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a. Dividend yield = Dividend / Stock price

0.017 = $1.68 / Stock price

Stock price = $1.68 / 0.017

Stock price = $98.82

b. Required return = (D₁/ P₀) + g

Required return = [$1.68(1 + 0.04) / $108.85] + 0.04

Required return = 0.0561 or 5.61%