Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per share. Inves
ID: 2756465 • Letter: S
Question
Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per share. Investors expect the dividend to grow at a rate of 5% indefinitely.
If the stock currently sells for $37 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations.)
If the expected rate of return on the stock is 17.5%, what is the stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per share. Investors expect the dividend to grow at a rate of 5% indefinitely.
Explanation / Answer
a) Dividend at end of year, D1 3.70 Growth Rate,g 5% Stock price , P0 37.00 ke= D1/P0 +g ke= 3.70/37 + 5% ke= 15% b) Return on stock, ke 17.50% Dividend at end of year, D1 3.70 Growth Rate,g 5% P0= D1/(ke-g) P0 = 3.70 / (17.5% - 5%) P0 = 3.70 / (12.5%) P0 = $29.60