Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors

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

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