Question

"Expected Return Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are expecting

Answer 1

• 15.7%

Step-by-step explanation:

The price of a stock can be modeled by the present value of the stream of future dividends discounted at a rate equal to the return expected.

The equation, when the dividends are expected to grow at a constant rate, less than the return rate is:

`Price_0=(Div_1)/(r-g)`

Where:

• Price₀ is the current price: $44.12

• Div₁ is the dividend to be paid a year from now: $0.46 × 1.145 = $0.53

• g is the expected constant growth rate: 14.5% = 0.145

• r is the expected return

Then, you can solve for r:

`r=(Div_1)/(Price_0)+g`

`r=(\$ 0.53)/(\$ 44.12)+0.145=0.157=15.7\%`