Steady As She Goes, Inc., will pay a year-end dividend of $3.50 per share. Inves

Question

Steady As She Goes, Inc., will pay a year-end dividend of $3.50 per share. Investors expect the dividend to grow at a rate of 6% indefinitely.

If the stock currently sells for $35 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 18.5%, 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 $3.50 per share. Investors expect the dividend to grow at a rate of 6% indefinitely.

Explanation / Answer

a. r= 3.5/35 + 6% = 10% + 6% = 16%

b. p= 3.50/(1.185) + ((3.50*1.06)/(0.185-0.06))/(1.185) =28.00

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