question archive You have been closely following the market performance of a stock and, as of the market close yesterday, the price per share was $31
You have been closely following the market performance of a stock and, as of the market close yesterday, the price per share was $31
Subject:FinancePrice:2.84 Bought7
You have been closely following the market performance of a stock and, as of the market close yesterday, the price per share was $31.15 (therefore, P0 = $31.15). It is your belief that the company will pay a dividend per share of $1.75 next year, which implies that DIV1 = $1.75. Your statistical analysis of earnings and dividend growth of this company tells you that earnings and dividends increase at a constant rate of 4.40 percent per year (meaning g = 4.40%). Under the assumption this stock behaves as a constant growth stock according to the Gordon growth model (or dividend discount model), what is the implied market rate of return on this stock (that is, find rE)? Please round your answer to the second decimal place.
Market Rate of Return (or rE) =
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Market Rate of Return (r E) = 10.02%
Step-by-step explanation
Using Gordon's growth model, the current value of stock (P 0) is given by;
P 0 = DIV 1/ (r E - g)
Where;
DIV 1 - Expected dividend a year from now
R E - The market rate of return
g- Constant growth rate
31.15 = 1.75/ (r E - 0.044)
RE - 0.044 = 1.75/ 31.15
R E - 0.044 = 0.05618
R E = 0.05618 + 0.044
= 0.1002 * 100
= 10.02%
Market Rate of Return (r E) = 10.02%
