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Eastern electric currently pays a dividend of about $1.64 per share and sells for $27 a share.


a. if investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock?

Respuesta :

anwar96iqbal

Answer:

The investors should expect to 9.26% of Return.

Explanation:

The Dividend Discount Model for Constant Growth should be used here.

DDM = Current Price = Dividend of Year 1 / (Required Return - Growth Rate)

Dividend of Year 1 = 1.64 (1.03) = 1.6892.

Re-arrange the above model for Required Return and put values:

Required Return = (1.6892 / 27) + .03 = .0926 OR 9.26%.

Thanks!  

jepessoa

Answer:

9.26%

Explanation:

using the Gordon growth model we can determine required rate of return:

current stock price = (dividends x growth rate) / (required rate of return - growth rate)

  • current stock price = $27
  • dividends = $1.64 x 1.03 = $1.6892
  • growth rate = 3%
  • RRR = ?

$27 = $1.6892 / (RRR - 3%)

RRR - 3% = $1.6892 / $27

RRR - 3% = 6.26%

RRR = 6.26% + 3% = 9.26%

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