Question

You've collected the following information from a financial web site.

52-Week Price		Stock (Div)	Div Yld %	PE Ratio	Close Price	Net Chg
Hi	Lo
77.40	10.43	Palm Coal 0.36	2.6	6	13.90	–0.24
56.56	34.17	Lake Lead Grp 2.29	5.6	10	41.18	–0.01
130.93	69.50	SIR 2.00	2.2	10	88.97	3.07

According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 3.04 percent. If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Required Return for Palm Coal Stock

Last year dividend (D1) = $0.36 per share

Dividend Growth Rate (g) = 3.04%

Current Share Price (P0) = $13.90 per share

Required Return = [D1 / P0] + g

Dividend in Next Year (D1)

Dividend in Next Year (D1) = D0 x (1 + g)

= $0.36 x (1 + 0.0304)

= $0.3709 per share

As per Dividend Growth Model, the Required Return = [D1 / P0] + g

= [$0.3709 / $13.90] + 0.0304

= 0.0267 + 0.0304

= 0.0571

= 5.71%

“Therefore, the required return for Palm Coal stock would be 5.71%”