Question

Steady As She Goes, inc. will pay a year-end dividend of $2 per share investors expect that dividend to grow at a rate of 5% indefinitely.
a. if the stock currently sells for $40 per share,what is the rate of return on the stock?
b. if the expected rate of return on the stock is 15.5% what is the stock price?

Answer 1

(a)

P0= Current price= $40

D1=Next expected dividend = $2

g= growth rate = 5% or 0.05

k = rate of return on stock

hence

=> K = 0.10 OR 10%

rate of return on the stock = 10%.

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(b)

P0= Current price

D1=Next expected dividend = $2

g= growth rate = 5% or 0.05

k = rate of return on stock = 15.5% or 0.155

hence,

hence stock price=$19.048