Question

Analysts expect Score Industries to make payouts of $2.18B at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that​ Oscorp's payouts will grow at a constant rate of 1.5% in perpetuity. Oscorp has 2.74B shares outstanding and its shares are currently trading for $16.54. What required return has the market priced into​ Oscorp's share​ price?

A)6.3%
B)5.7%
C)8.8%
D)6.9%

Answer 1

Using the Gordon Growth Model, the market has priced in a required return of approximately 6.3% for Oscorp's share price.

Step-by-step explanation:

To calculate the required return that the market has priced into Oscorp's share price, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model determines the value of a stock based on its future dividends that grow at a constant rate.

The formula is:

Price = Dividend / (Required return - Growth rate)

Currently, Oscorp's shares are trading for $16.54, and it expects to make payouts of $2.18 billion at the end of this year. With 2.74 billion shares outstanding, the dividend per share would be:

Dividend per share = Total Dividends / Total shares = $2.18 billion / 2.74 billion = $0.7956 per share

The growth rate of dividends is given as 1.5%. Plugging all these into the formula and solving for the Required return:

$16.54 = $0.7956 / (Required return - 0.015)

Required return = ($0.7956 / $16.54) + 0.015

Required return ≈ 0.048 + 0.015

Required return ≈ 6.3%

Thus, the required return priced into Oscorp's share price is approximately 6.3%, which corresponds to option A).