Please show work Calculate the expected return on stock State of the economy Pro
ID: 2639448 • Letter: P
Question
Please show work
Calculate the expected return on stock
State of the economy Probability of the state % returns on stock
Economic Recession 25% -8.5%
Boom 12% 15.6%
Steady economic growth 63% 3.4%
Round to two decimals places in percentage
The Black bear Company just paid an annual dividend of $5.98. If you expect a constant growth rate of 8% and have a required rate of return of 12.65% what is the current stock price according to the constant growth dividend model (Gordon Model).
Round the answers to two decimals
You are considering the purchase of a share of Blue Grass, Inc. common stock. You expect to sell it at the end of one year for $87.00 per share. You will also receive a dividend of $5.36 per share at the end of the next year. If your required return on this stock is 7.39% what is the most you would be willing to pay for Blue Grass Inc. common stock now?
Round the answers to two decimals
Explanation / Answer
1. Expected return on stock = -(0.25* 8.5% ) + (0.12 * 15.6 %) + (0.63 * 3.4%) = 1.89%
2. Price of Stock = Dividend one year from now/(required rate of return - growth rate)
= (5.98*1.08)/(12.65%-8%) = 6.4584 / 4.65% = $138.89
3. Price of Share now = Present value of future income from sale of share and dividend received per share
= (87+ 5.36) / (1+7.39%) = $86
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