Question

Assume​ ExxonMobil's price dropped to ​$35 overnight. Given the dividend growth rate of ExxonMobil of 8.00​% and the last annual dividend of ​$1.70​, what is the implied required rate of return necessary to justify the new lower market price of $ 35​? What is the implied required rate of return necessary to justify the new lower market price of $ 35​?

Answer 1

Re = 13.26%

Step-by-step explanation:

we can use the dividend growth model:

P₀ = Div₁ / (Re - g)

• P₀ = $35
• Div₁ = $1.70 x 1.08 = $1.836
• g = 8%
• Re = cost of equity or required rate of return = ?

$35 = $1.836 / (Re - 0.08)

Re - 0.08 = $1.836 / $35 = 0.0526

Re = 0.0526 + 0.08 = 0.1326 = 13.26%