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A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

Respuesta :

Answer:

Expected return = 14.14%

Explanation:

Using the dividend growth model we have,

[tex]P_0 = \frac{D_1}{K_e - g}[/tex]

Where P0 represents current market price of the share.

D1 = Dividend at year end = $3.50

Expected growth rate = g = 10%

Ke = Expected Return

Now putting values in above, equation or formula we have

[tex]84.50 = \frac{3.50}{K_e - 0.10}[/tex]

[tex]K_e - 0.10 = \frac{3.50}{84.50} = 0.0414[/tex]

Ke = 0.0414 + 0.10 = 0.1414 = 14.14%

Thus, expected return = 14.14%

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