Question

A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

Answer 1

Expected return = 14.14%

Step-by-step explanation:

Using the dividend growth model we have,

`P_0 = (D_1)/(K_e - g)`

Where P0 represents current market price of the share.

D1 = Dividend at year end = $3.50

Expected growth rate = g = 10%

Ke = Expected Return

Now putting values in above, equation or formula we have

`84.50 = (3.50)/(K_e - 0.10)`

`K_e - 0.10 = (3.50)/(84.50) = 0.0414`

Ke = 0.0414 + 0.10 = 0.1414 = 14.14%

Thus, expected return = 14.14%