A stock is trading at $80 per share. The stock is expected to have a year-end di
ID: 2758658 • Letter: A
Question
A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $3 per share (D1= $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of g? Round the answer to three decimal places.
What is the required rate of return on a preferred stock with a $50 par value, a stated annual dividend of 12% of par, and a current market price of (a) $61, (b) $86, (c) $108, and (d) $148 (assume the market is in equilibrium with the required return equal to the expected return)? Round the answers to two decimal places.
Explanation / Answer
P0 =D1/Ke-g 80 =3/0.14-g 0.14-g =3/80 0.14-g 0.0375 0.10250 g g 10.25% P0 =D1/Ke-g P0 =D1/Ke-g 61 =6/Ke-0.1025 Ke-0.1025 =6/61 Ke-0.1025 0.098360656 Ke 0.20086 Ke 20.086% P0 =D1/Ke-g 86 =6/Ke-0.1025 Ke-0.1025 0.069767442 Ke 0.17227 Ke 17.227 P0 =D1/Ke-g 108 =6/Ke-0.1025 Ke-0.1025 0.055555556 Ke 0.15806 Ke 15.806% P0 =D1/Ke-g 148 =6/Ke-0.1025 Ke-0.1025 0.040540541 Ke 0.14304 Ke 14.304%
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