Question

# Stock Values The next dividend payment by ECY, Inc., will be \$2.90 per share. The dividends...

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?

#### Homework Answers

Answer #1

Solution:

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

P = D1 / ( Ke – g )

Where,

P= Price of the stock

D1 = Next dividend payment

Ke = Required Return

g = growth rate

As per the information given in the question we have

P = \$ 53.10     ;   D1 = \$ 2.90   ;    g = 5.5 % = 0.0550   ; Ke = to find

Applying the above values in the formula we have

53.10 = 2.90 / (Ke – 0.0550 )

(Ke – 0.0550 )= 2.90 / 53.10

(Ke – 0.0550 ) = 0.0546

Ke = 0.0550 + 0.0546 = 0.1096

Thus Ke = 10.96 %

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

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