Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely. a. If the stock currently sells for $30 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) Expected rate of return % b. If the expected rate of return on the stock is 16.5%, what is the stock price? (Do not round intermediate calculations.)

Question

Business

Hector Franklin

31 October, 19:46

Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely. a. If the stock currently sells for $30 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) Expected rate of return % b. If the expected rate of return on the stock is 16.5%, what is the stock price? (Do not round intermediate calculations.)

+2

Answers (1)

Know the Answer?

Wilcox · Answer 1

(a) 14%

(b) $24 per share

Explanation:

Given that,

Dividend paid per share = $3

Growth rate of dividend = 4%

(a) Expected rate of return:

= [D1 : Price ] + g

= [3 : 30 ] + 0.04

= 0.10 + 0.04

= 0.14 or 14%

Therefore, the expected rate of return is 14%.

(b) Stock price:

= D1 : (cost - growth)

= 3 : (0.165 - 0.04)

= 3 : 0.125

= $24 per share

Therefore, the stock price is $24 per share.