You’ve collected the following information from your favorite financial Web site

Question

You’ve collected the following information from your favorite financial Web site. 52-Week Price Stock (Div) Div Yld % PE Ratio Close Price Net Chg Hi Lo 77.40 10.43 ArchCoal 0.36 2.5 6 13.90 –0.24 55.81 33.42 LacledeGrp 1.54 3.7 10 40.43 –0.01 130.93 69.50 IBM 2.00 2.3 10 88.97 3.07 50.24 13.95 JCPenney 0.80 5.2 6 15.43 –0.26 35.00 20.74 TootsieRoll 0.32 1.5 28 ?? 0.18 According to the 2009 Value Line Investment Survey, the growth rate in dividends for JCPenney for the previous 10 years has been –11 percent. Required: If investors feel this growth rate will continue, what is the required return for JCPenney stock?

Explanation / Answer

Required return for JCPenney stock = Dividend Yield % + Growth rate

Required return for JCPenney stock = 5.2% + 11%

Required return for JCPenney stock = 16.2%

Alternatively

Required return for JCPenney stock = Expected Dividend /Current Stock Price + Growth rate

Required return for JCPenney stock = 0.8/15.43 + 11%

Required return for JCPenney stock = 16.2%

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