The common stock of Sweet Treats is selling for $53.75 per share. The company is expected to have an annual dividend increase of 4.2 percent indefinitely and pay a dividend of $4.20 in one year. What is the total return on this stock?
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Answer:
Dividend discount model id used to find share price by discounting all the future dividend from the stock.
Share price = Next year dividend/ (Required return - dividend growth rate)
Where,
Share price = $53.75
Dividend = $4.2
Dividend growth rate = 4.2%
Let’s put all the values in the formula to find required rate
53.75 = 4.2/ (X - 0.042)
53.75*X - 2.2575 = 4.2
53.75*X = 4.2 + 2.2575
53.75*X = 6.4575
X = 6.4575/53.75
X = 0.12014
So required rate of the stock is 12.01%
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