You\'ve collected the following information from a financial web site. According

Question

You've collected the following information from a financial web site.

According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 4.22 percent. If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

52-Week Price Stock (Div) Div
Yld % PE
Ratio Close
Price Net
Chg Hi Lo 77.40     10.43         Palm Coal 0.36 2.6      6        13.90     –0.24     56.56     34.17        Lake Lead Grp 2.29 5.6      10        41.18    –0.01     130.93     69.50        SIR 2.00 2.2       10        88.97     3.07    

Explanation / Answer

equired return on a stock is dividend yield next year plus the dividend's long-term growth rate: r = [D 1 /P]

Since dividend growth is expected to constant forever including next year, next year's equals last year's dividend multiplied by one plus the growth rate D 1 = D * (1+ g)

Substituting, then r = [D (1+g) / P

estimate of long-term dividend growth is 4.22% per year for Palm Coal

Palm Coal's dividends over the past year have been $0.36 per share

Palm Coal's latest market price is $13.90 per share.

Then investors' required return on Palm Coal stock is estimated as r = [$0.36 (1 + .0422) / $13.90] + .0422 = .0691 or 6.91% per year.

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