1A. Whitewater\'s stock is trading at $41.00 per share. The stock is expected to

Question

1A. Whitewater's stock is trading at $41.00 per share. The stock is expected to have a year-end dividend of $2.60 per share (D1), which is expected to grow at some constant rate g throughout time. The stock's required rate of return is 12 percent. If you are an analyst who believes in efficient markets, what is your forecast of g? Answer in a percentage without the % sign, and round it to two decimal places, i.e., 10.54 for 10.54% (or 0.1054).

2B.

If the expected rate of return on a stock exceeds the required rate, the stock should be sold as the price will fall.

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Explanation / Answer

Required rate of return of a stock=(Dividend/Price)+growth

Given, required return=12% that is 0.12, dividend=$2.6 and price=$41.

So, 0.12=(2.6/41)+g

or, 0.12=0.0634+g

or, g=0.0566 that is growth=5.66.

If expected return exceeds required return, stock is underpriced and should be bought. So the given statement is False.

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