Question

Pacears current stock price is $117.85 and it islikely to pay a $2.88 dividend next year Since an alysts estimate Paccar will have an 43 percent growth rate, whiat is its required return? (Round your answer to 2 decimal places-)

Answer 1

The required return for Paccar's stock, given a current price of $117.85, an expected $2.88 dividend, and a 4.3% growth rate, is 6.72%.

Step-by-step explanation:

Required Return Calculation for Paccar's Stock

To calculate the required return on Paccar's stock, we can use the dividend discount model (DDM), which assumes that the price of a stock is the present value of all future dividends. If Paccar's current stock price is $117.85 and it is expected to pay a $2.88 dividend next year with an estimated growth rate of 4.3%, the required return (r) can be found using the formula:

P = D1 / (r - g)

where P is the current stock price, D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate.

Following the formula, we get:

117.85 = 2.88 / (r - 0.043)

Therefore:

r - 0.043 = 2.88 / 117.85

r = (2.88 / 117.85) + 0.043

r = 0.0672 (rounded to 4 decimal places for intermediate calculation)

So, the required return is 6.72%, when converted to a percentage and rounded to two decimal places.