Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors
ID: 2772758 • Letter: S
Question
Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.
If the stock currently sells for $30 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a whole percent.)
If the expected rate of return on the stock is 16.5%, what is the stock price? (Do not round intermediate calculations.)
Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.
Explanation / Answer
a)expected rate of return = [D1/Price ] + g
= [3 / 30 ] + .04
= .10 +.04
= .14 or 14%
b)stock price =D1 / (cost -growth)
= 3 / (.165 - .04)
= 3 / .125
= $ 24 per share