Question

Determine the required rate of return for Johnson and Johnson​, assuming the geometric growth rate was 13.04​% for the period​ 2001-2010, its trading price on January​ 14, 2011 was ​$62.55​, and the dividend for 2010 was ​$2.110.

Answer 1

13.08%

Step-by-step explanation:

Use the dividend model to calculate Required return

given P=$62.55

g=13.04%

D0=2.110

r=?

The formula P=D1/r-g

First calculate D1 =2.110×1.1304

=2.385

substitute in the formula and solve for r

62.55 = 2.385/r-13.04

Cross multiply we get

62.55r-815.652 = 2.385

62.55r=818.037

62.55r/62.55=818.037/62.55

r=13.078/13.08%

Answer 2

The required rate of return for Johnson and Johnson is 16.85%

Step-by-step explanation:

Johnson and Johnson paid an annual dividend of $2.110 last year, the geometric growth rate was 13.04​ percent during last ten years.

To find out the expected dividend to be paid be Johnson and Johnson this year.

= [$2.110(1.1304)]

= $2.385

Required Rate of Return is calculated by the following formula,

R =
`(expected dividend)/(current share price) + growth rate for dividend`

R = 2.385/62.55 + 0.1304

R = .1685, or 16.85%