Question

You've collected the following information from your favorite financial website. 52-Week Price PE Ratio Hi 77.40 55.81 130.93 50.41 35.00 Lo 10.43 33.42 69.50 14.12 20.74 Stock (Div) Palm Coal.36 Lake Lead Grp 1.54 SIR 2.00 DR Dime.97 Candy Galore.32 Div Yld % 2.6 3.8 2.2 6.2 1.5 10 10 6 28 Close Price 13.90 40.43 88.97 15.60 ?? Net Chg -24 -.01 3.07 -26 18 According to your research, the growth rate in dividends for DR Dime for the previous 10 years has been negative 10 percent. If investors feel this growth rate will continue, what is the required return for DR Dime stock? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Required return 5.46 %

Answer 1

Required return for DR Dime Stock

Here, we’ve Current Year Dividend (D0) = $0.97 per share

Dividend Growth Rate (g) = -10%

Current Share Price (P) = $15.60 per share

Dividend in Next Year (D1)

Dividend in Next Year (D1) = D0 x (1 + g)

= $0.97 x (1 – 0.10)

= $0.97 x 0.90

= $0.8730 per share

As per the Discounted cash flow method, the required return for the stock is calculated as follows

Required return for the stock = [D1 / P0] + g

= [$0.8730 / $15.60] – 0.10

= 0.0560 – 0.10

= -0.0440 or

= -4.40% (Negative)

“Therefore, the required return for DR Dime stock will be -4.40% (Negative)”