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Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely. If the stock currently sells for $30 per share, what is the expected rate of return on the stock?

Respuesta :

Answer:

r = 14%

Explanation:

In order to calculate the price of a stock with indefinite dividend growth, we use the following formula:

P = Year-end dividend / (r-g)

P: Stock price

r: Required rate of return (Missing value)

g: Dividend growth rate (4%)

We have:

30 = 3 / (r - 0.04)

--> r = 14%

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