Question

Zero-sum enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8% and are expected to continue growing at that rate. What is the return on zero-sum if its price is $12?

Answer 1

The return on Zero-sum is calculated using the Gordon Growth Model with a given dividend of $0.48, a stock price of $12, and a growth rate of 8%. The computed return on investment is 12%.

Step-by-step explanation:

The return on Zero-sum can be calculated using the Gordon Growth Model, which is used to determine the present value of future dividends when they grow at a constant rate.

To calculate the expected rate of return (r), we use the formula:

r = (D1 / P0) + g

where D1 is the expected dividend next year, P0 is the current stock price, and g is the growth rate of dividends.

Given that D1 = $0.48, P0 = $12, and g = 8% (or 0.08), the return on Zero-sum is calculated as:

r = ($0.48 / $12) + 0.08 = 0.04 + 0.08 = 12%

This means that if the stock price of Zero-sum is $12, and it pays a dividend expected to grow at 8%, an investor would expect a 12% return on their investment in Zero-sum.