Question

Stock Values The next dividend payment by ECY, Inc., will be $2.90 per share. The dividends are anticipated to maintain a growth rate of 5.5 percent, forever. If the stock currently sells for $53.10 per share, what is the required return?

Answer #1

**Solution:**

As per the Gordon growth model, the price of a stock can be calculated using the following formula :

P = D** _{1}** / (
K

Where,

P= Price of the stock

D** _{1}** = Next dividend payment

K** _{e}** = Required Return

g = growth rate

As per the information given in the question we have

P = $ 53.10 ;
D** _{1}** = $ 2.90 ;
g = 5.5 % = 0.0550 ;
K

Applying the above values in the formula we have

53.10 = 2.90 / (K** _{e}** – 0.0550 )

(K** _{e}** – 0.0550 )= 2.90 / 53.10

(K** _{e}** – 0.0550 ) = 0.0546

K** _{e}** = 0.0550 + 0.0546 = 0.1096

**Thus K _{e} = 10.96 %**

**Thus the required rate of return of ECY, Inc., is =
10.96 %**

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