Question

McCracken​ Roofing, Inc., common stock paid a dividend of $1.29 per share last year. The company expects earnings and dividends to grow at a rate of 9​% per year for the foreseeable future.  

a.What required rate of return for this stock would result in a price per share of $28​?

b. If McCracken expects both earnings and dividends to grow at an annual rate of 11​%,

what required rate of return would result in a price per share of $28​? round to two decimal places.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

в с Last dividend $1.29 4 Growth rate Expected dividend Current price of stock 9% $1.41 $28.00 Required return 14.02% b. 10 11 Growth rate Expected dividend Current price of stock 11% $1.43 $28.00 Required return 16.11%

Cell reference -

В Last dividend 1.29 4 a. 5 6 Growth rate Expected dividend Current price of stock 0.09 =$C$2*(1+C4) 28 7 8 Required return =C5/C6+C4 9 10 b. 11 Growth rate Expected dividend Current price of stock 0.11 =$C$2*(1+C10) 28 12 Required return =C11/C12+C10

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.