Ask Question
4 November, 01:51

A stock sells for $50. The next dividend will be $5 per share. If the rate of return earned on reinvested funds is a constant 15% and the company reinvests a constant 20% of earnings in the firm, what must be the discount rate

+2
Answers (1)
  1. 4 November, 04:22
    0
    The answer is 13%

    Explanation:

    Solution

    Recall that:

    A stock sells for = $50

    The next dividend is = $5 per share

    The rate of return = 15%

    Company reinvests a constant of = 20%

    What is the rate of discount = ?

    Now

    The first step is to calculate the rate of growth which is shown below:

    g = equity return * retention rate

    g = 15% * 0.2 = 3%

    Thus,

    The Gordon growth model is stated below:

    Stock price = dividend in following year / (discount - g)

    So,

    50 = 5 / (discount - g)

    The discount - g = 5/50

    Discount - g = 10%

    The discount = 10 + 3 = 13%

    Therefore the discount rate = 13%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “A stock sells for $50. The next dividend will be $5 per share. If the rate of return earned on reinvested funds is a constant 15% and the ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers