Question

5. Total Construction sells a share of common stock for $28.16. Annual dividends next year is
expected to be $1.35 and has over the years been increasing its dividends by 3% annually. What
is the expected rate of return on the company’s stock if it expects to continue the same growth
pattern in the coming years?

6. Grenlec’s preferred stock is selling for $25 in the market and pays $2.5 in dividends. What is the
expected rate of return on the stock? If your required rate of return is 12 percent, what is the
fair value of the stock for you? Should you acquire the stock?

Answer 1

5)

Expected rate of return ( r)	D1÷P0+g
Here,
Net stock price (P0)	$                     28.16
Expected dividend (D1)	$                       1.35
Growth rate (g)	3.000%
Expected rate of return ( r)	7.79%
	1.35÷28.16+3%