Question

Steady As She Goes Inc. will pay a year-end dividend of $3.80 per share. Investors expect the dividend to grow at a rate of 6% indefinitely. a. If the stock currently sells for $38.00 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 18.50%, what is the stock price? (Do not round intermediate calculations. Enter your answers rounded to 2 decimal places.)

Answer 1

a. 16%

b. $30.40

Step-by-step explanation:

a. Using the Gordon Growth model, the value of a share is;

Value = Next dividend/ ( Expected return - growth rate)

So;

38 = 3.80 / ( Rate - 6%)

Rate - 6% = 3.80/38

Rate = 3.80/38 + 6%

= 16%

b. Value = Next dividend/ ( Expected return - growth rate)

= 3.80/ ( 18.50% - 6%)

= $30.40