Question

Canvas A company pays annual dividends of 3.00 with no possibility of it changing in the future. If the firm's stock is currently selline 2440, what is the required rate of return 12.92% 12.67% 11 56% 12.30% Question 34 1 pts Dinal purchased a stock for $80 a year ago. The stock just paid a dividend of $2.40 and is now worth $93. What is holding period return to Dingil? 17.71% 16.56% 219.25% 19.60 19.25%

Answer 1

Answer to question 1.

The Gordons formula consists of the following parameters:

1. Value of stock (P0) = D1 / r – g
2. D1 = the annual expected dividend of the next year.
3. r = required rate of return and the same is quoted in %.
4. g = the expected dividend growth rate .

For the question , the values of D1 , P0 and g can be extracted and put into the formula to calculated required rate of return i.e. r. Since g i.e. growth rate is not available in the question , the expected dividend can be considered as the only return from the stock and g can be assumed as 0 due to lack of capital appreciation.

P1= $24.4 and D1 = $3.00

Therefore , $24.4 = $3.00/ r - 0 , on solving r = 12.30% .

Answer to question 2.

Holding Period Return is the sum total of capital appreciation from the script and any dividend paid from the stock.

Formula to Holding Period Rate of Return (HPR) is :

HPR = ((Income + (end of period value - original value)) / original value) * 100

The above information can be extracted from the question to solve the question :

HPR =(($2.4 + ($93-$80))/$80)*100

On solving , HPR = 19.25%.