A firm pays a $2.50 dividend at the end of year one ( D 1 ), has a stock price o

Question

A firm pays a $2.50 dividend at the end of year one (D1), has a stock price of $111 (P0), and a constant growth rate (g) of 12 percent.

Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Indicate whether each of the following changes will increase or decrease the required rate of return (Ke). (Each question is separate from the others. That is, assume only one variable changes at a time.) No actual numbers are necessary.

Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Cost of equity, re = D1÷Price+Growth rate

D1 is expected dividend

= $2.5÷$111+12%

= 14.25%

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