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XYZ Corp. just paid a dividend today of $8.60per share. The dividend is expected to grow...

XYZ Corp. just paid a dividend today of $8.60per share. The dividend is expected to grow at a constant rate of 2.8% per year. If XYZ Corp. stock is selling for $22.00 per share, what is the stockholders' expected rate ofreturn? Submit your answer as a percentage and round to two decimal places.

(1) Describe and interpret the assumptions related to the problem.

(2) Apply the appropriate mathematical model to solve the problem.

(3) Calculate the correct solution to the problem.

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Homework Answers

Answer #1

Dividend Discount Model is needed to solve the problem.
Assumptions relating to Dividend discount model are that
1. It is based on presumption that the company will keep on paying dividends every year.
2. The growth rate will be constant through the lifetime of the project. Growth won't fluctuate through the lifetime of the company

Dividend next year =8.60
Price =22
Growth =2.8%
Required Rate of Return using Dividend Discount Model =Dividend next year/Price + growth =8.60/22+2.8%=41.89%

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