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An investment that currently sells for $240 makes payments every year forever, which grows at 8%...

An investment that currently sells for $240 makes payments every year forever, which grows at 8% annually. If the next payment amount is $12, what is the annual return on this investment?

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Answer #1

Price of Security :
The price is a reflection of the company's value – what the public is willing to pay for a piece of the company. It is nothing but present value of cash flows ( Div & Sale Price of Stock at future date) from it.

P = D1 / [ Ke - g ]
D1 - Cash flow after 1 Year
P0 - Price Today
Ke - Required Ret
g - Growth rate

Particulars Amount
D1 $           12.00
Growth rate 8%
Price $         240.00

Ke = [ D1 / P0 ] + g
= [ 12 / 240 ] + 0.08
= 0.05 + 0.08
= 0.13
I.e13 %

Annual Ret from investment is 13%

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