Ask Question
16 September, 22:47

Company B is expected to pay a dividend of $2 per share at the end of year 1 and the dividends are expected to grow at a constant rate of 4 percent forever. If the current price of the stock is $20 per share, calculate the expected return (i. e., the cost of equity capital for the firm)

+3
Answers (1)
  1. 16 September, 23:44
    0
    The answer is 14%

    Explanation:

    This will be solved by Dividend discount model based approach

    re = D1/Po + g

    where re is the rate of return

    D1 is expected dividend ($2)

    Po is the current market value of equity ($20)

    g is the expected growth rate of dividend (4% or 0.04)

    2/20 + 0.04

    0.1 + 0.04

    = 0.14

    Expressed as a percentage is

    0.14 x 100

    14%

    Therefore, the expected return is 14%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Company B is expected to pay a dividend of $2 per share at the end of year 1 and the dividends are expected to grow at a constant rate of 4 ...” 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