Question

Assume​ ExxonMobil's price dropped to ​$39 overnight. Given the dividend growth rate of ExxonMobil of 4.00​% and the last annual dividend of ​$1.35​, what is the implied required rate of return necessary to justify the new lower market price of $39​?

What is the implied required rate of return necessary to justify the new lower market price of $39?

Answer 1

Implied Required Rate of Return

Firm's Required Rate of Return is calculated by using the following formula

Required Rate of Return = [D0(1 + g) / P0] + g

Where, Dividend in Next Year (D1) = $1.40 per share [$1.35 x (1 + 0.04)]

Current selling price of the share (P0) = $39.00 per share

Dividend Growth Rate (g) = 4%

Therefore, the Required Rate of Return = [D0(1 + g) / P0] + g

= ($1.40 / $39.00) + 0.04

= 0.0360 + 0.04

= 0.0760

= 7.60%

“Hence, the implied required rate of return necessary to justify the new lower market price of $39 = 7.60%”