Question

Steady As She Goes Inc. will pay a year-end dividend of $3.90 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.

a. If the stock currently sells for $39.00 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a whole percent.)
b. If the expected rate of return on the stock is 16.50%, what is the stock price? (Do not round intermediate calculations.)

Answer 1

The expected rate of return on the stock is 10%. The stock price when the expected rate of return is 16.50% is $31.20 per share.

Step-by-step explanation:

To determine the expected rate of return on the stock, we can use the dividend growth model. The formula for the expected rate of return is:

Expected Rate of Return = (Dividend / Stock Price) + Growth Rate

Using the given information:

• Dividend = $3.90 per share
• Growth Rate = 4%
• Stock Price = $39.00 per share

Plugging in these values into the formula:

Expected Rate of Return = ($3.90 / $39.00) + 0.04 = 0.10 = 10%

Therefore, the expected rate of return on the stock is 10%.

To calculate the stock price when the expected rate of return is 16.50%, we can rearrange the formula to solve for Stock Price:

Stock Price = Dividend / (Expected Rate of Return - Growth Rate)

Plugging in the given values:

• Dividend = $3.90 per share
• Expected Rate of Return = 16.50%
• Growth Rate = 4%

Using these values:

Stock Price = $3.90 / (0.165 - 0.04) = $3.90 / 0.125 = $31.20 per share

Therefore, the stock price when the expected rate of return is 16.50% is $31.20 per share.