Question

You’ve collected the following information from your favorite financial website.
  

52-Week Price		Stock (Div)	Div Yld %	PE Ratio	Close Price	Net Chg
Hi	Lo
79.0	10.59	Palm Coal .52	3.4	6	15.50	–.24
55.81	33.42	Lake Lead Grp 1.54	3.8	10	40.43	–.01
130.93	69.50	SIR 2.00	2.2	10	88.97	3.07
50.24	13.95	DR Dime .80	5.2	6	15.43	–.26
35.00	20.74	Candy Galore .32	1.5	28	??	.18

  
According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 3.5 percent.
  
If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Required return             %

Answer 1

As the information about dividend, constant growth rate and price of share is available, we can use the constant growth model to find out the required return of the stock;

     P = D1 / (K-g)

     Or K – g = D1 / P

     Or K = (D1 / P) + g

            Here; D1 = D0 (1 + g)

So put the values to find out Required Rate of Return on Equity;

     K = [0.52 (1 + 0.035) / 15.50] + 0.035

     K = 0.03472 + 0.035

     K = 0.06972 or 6.972%

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