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Steady As She Goes Inc
Steady As She Goes Inc. will pay a year-end dividend of $2.60 per share. Investors expect the dividend to grow at a rate of 6% indefinitely.
a) If the stock currently sells for $26.00 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.)
Expert Solution
a.)
Required Rate of Return = D1 / P0 + g
here,
Year-end dividend (D1) = $2.60
Growth Rate (g) = 6%
Current Price (P0) = $26
Put the values in the formula;
Required Rate of Return = $2.60 /$26 + 6%
= 0.16 or 16%
b.)
Stock Price = D1 / (r - g)
here,
Year-end dividend (D1) = $2.60
Growth Rate (g) = 6%
Rate of return (r) = 18.50%
Stock Price = $2.60 / (18.50% - 6%)
Stock Price = $20.8
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