Question

A company last paid a dividend of £3. If the expected return on its equity is...

A company last paid a dividend of £3. If the expected return on its equity is estimated at 12% and its shares are currently quoted on London Stock Exchange at £75, what should the dividend growth rate be to ensure that the price is consistent with the pricing of a growing perpetuity?

Homework Answers

Answer #1

Answer - growth rate = 7.6923%

Concept of Dividend discount model

As per dividend discount model price of the share is equal to the present value of all the future dividends discounted using expected return on equite

S0 = D1 / (Re - g)

S0 = Stock price today = 75

Re = return on equity = 0.12

g = growth rate of dividend

D1 = Dividend at the end of year 1

D1 = 3 * (1+g)

Solution

Putting values in the above formulae

75 = 3*(1+g) / (0.12-g)

75 (0.12-g) = 3 + 3g

9 - 75g = 3 + 3g

78g = 6

g = 6 / 78

g = 0.0769 ot 7.69%

answered by: anonymous
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company last paid a dividend of £3. If the expected return on its equity is...
A company last paid a dividend of £3. If the expected return on its equity is estimated at 12% and its shares are currently quoted on London Stock Exchange at £75, what should the dividend growth rate be to ensure that the price is consistent with the pricing of a growing perpetuity?
The last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to...
The last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10%. The company required rate of return on equity is 12%. Calculate the current price of the common stockThe last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected...
A company is trying to estimate its cost of equity. The risk free rate of return...
A company is trying to estimate its cost of equity. The risk free rate of return is 4.75% while the required rate of return is 9.75%. The company's beta is 1.2. The current stock price is $45.00 and the last dividend paid was $2.25; the expected constant growth rate is 5.00%. What is the estimated cost of equity using the Capital Asset Pricing Model? What is the estimated cost of equity using the Discounted Cash Flow approach? Why do the...
A share last year paid a dividend of $3, the company is expected to have a...
A share last year paid a dividend of $3, the company is expected to have a constant rate of growth of dividends of 4%. The required rate of return is 12% what according to the Gordon constant growth model is a fair price for the share? What would be the fair price for the share of the forecast growth rate of dividends was to be raised to 9%?
1.           Company ABC paid a dividend of $1.40 recently. Dividend growth is expected to be 8%. What...
1.           Company ABC paid a dividend of $1.40 recently. Dividend growth is expected to be 8%. What should be the price of the stock if the required rate of return is 12%? $30.00 $32.60 $35.00 $37.80 1.          Company XYZ expected to pay a dividend of $3.00 next year. Dividend growth is expected to be 6%. What should be the price of the stock today and five years from today? The required rate of return is 10%. $75 and $106.39 $75.00 and $100.37...
the last dividend paid by coppard inc. was $1.25. the dividend growth rate is expected to...
the last dividend paid by coppard inc. was $1.25. the dividend growth rate is expected to be constant at 35% for 3 years, after which dividends are expected to grow at a rate of 6% forever. if the firms required return rate is 11%, what is its current stock price?
The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to...
The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 50% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?
The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to...
The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 32.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?
Company X currently paid a $4 per share dividend on its common stock. Dividends are expected...
Company X currently paid a $4 per share dividend on its common stock. Dividends are expected to grow forever at 6% and investors require a 15% rate of return. Company X's management is planning to enter new, risky markets to increase its expected dividend growth. However, due to increased risk, the investors required rate of return will increase to 20%. What must be the new value for the dividend growth to justify entering the new, risky markets and to keep...
Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected...
Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected to grow at a steady rate of 6% for the foreseeable future. The firm’s shares are currently selling for $30 per share, with an equity beta of 1.2. The risk-free rate is 5% and expected market return is 12%. What is the firm’s estimated cost of equity if we were to calculate it as the average of the costs of equity from the dividend...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT