Question

You've collected the following information from your favorite financial website. 52-Week Price Div Yld % 2.6 PE Ratio Lo 10 Hi 77.40 55.81 130.93 50.40 35.00 10.43 33.42 69.50 14.11 20.74 Stock (Div) Palm Coal 36 Lake Lead Grp 1.54 SIR 2.00 DR Dime.96 Candy Galore 32 3.8 22 Close Price 13.90 40.43 88.97 15.59 ?? Net Chg - 24 -01 3.07 - 26 18 10 28 According to your research, the growth rate in dividends for DR Dime for the previous 10 years has been negative 12 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.) Required return

Answer 1

Current Share price of the stock = Closing Price of the Stock = $15.59

Current Dividend on stock of DR Dime = $0.96

Growth rate = -12%

Expected Dividend on stock of DR Dime = 0.96*(100-12)% = 0.96*0.88 = $0.8448

Required rate of return = ? , Let it be “Re”

As per Constant Dividend Growth Model,

Current Share Price of the Stock = Expected Dividend/(Required rate of return-Growth Rate)

15.59 = 0.8448/(Re-(-12%))

15.59 = 0.8448/(Re+0.12)

Re + 0.12 = 0.054189

Re =- 0.06581

Re = 6.58%

Therefore, Required return for DR Dime Stock = -6.58%