Question

You've collected the following information from your favorite financial website 52-Week Price Lo Hi 77.40 55.81 130.93 50.24 35.80 10.43 33.42 69.50 13.95 20.82 Stock (Div) Palm Coal.36 Lake Lead Grp 1.54 SIR 2.00 DR Dime.80 Candy Galore 0.40 Div Yld % 2.6 3.8 2.2 5.2 1.5 PE Close Net Ratio Price Chg 6 13.90 - 24 10 40.43 -.01 10 88.97 3.07 6 15.43 - 26 28 ?? 18 a. Using the dividend yield, calculate the closing price for Candy Galore 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 Candy Galore was $26.36. Your research projects a 4.75 percent dividend growth rate for Candy Galore. 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.) a. Stock price b. Required return

Answer 1

a. Stock price = Dividend / Dividend yield

Stock price = $0.40 / 0.015

Stock price = $26.67

b. Required return = (D1/ P0) + g

Required return = [$0.40(1 + 0.0475) / $26.36] + 0.0475

Required return = 0.0634 or 6.34%