McCracken Roofing, Inc., common stock paid a dividend of $1.13 per share last ye
ID: 2734488 • Letter: M
Question
McCracken Roofing, Inc., common stock paid a dividend of $1.13 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of $20? b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $20? a. The required rate of return for this stock, in order to result in a price per share of $20, is. (Round to two decimal places.)Explanation / Answer
Price (p0) = D1 (1+g) / r
$20 = $1.13 (1+0.07) / r
r = 6.05 (rounded)
Where
p0 = Price at year 0
D1 = Dividend at Year 1
g = growth rate
b.
Price (p0) = D1 (1+g) / r
$20 = $1.13 (1+0.11) / r
r = 6.27 (rounded)