You’ve collected the following information from your favorite financial website.
ID: 2777740 • Letter: Y
Question
You’ve collected the following information from your favorite financial website. 52-Week Price Stock (Div) Div Yld % PE Ratio Close Price Net Chg Hi Lo 78.2 10.51 Palm Coal 0.44 3.0 6 14.70 –0.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –0.01 130.93 69.50 SIR 2.00 2.2 10 88.97 3.07 50.24 13.95 DR Dime 0.80 5.2 6 15.43 –0.26 35.00 20.74 Candy Galore 0.32 1.5 28 ?? 0.18 According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 3.50 percent.
Required: If investors feel this growth rate will continue, what is the required return for Palm Coal stock?
Explanation / Answer
Current stock price = Dividend paid * (1 + Dividend growth rate) / Required return - Dividend growth rate)
=> $14.70 = $0.44 * (1 + 3.5%) / (Required return - 3.5%)
=> Required return = 6.60%
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