The share price of AMZN stock that we expected in 5 years is $5000

Finance Dec 21, 2020

The share price of AMZN stock that we expected in 5 years is $5000. It is also expected that
the company will pay $100 per share as dividends in 6 years. If the dividends afterward can
grow at %6, what is the appropriate rate of return on equity?

Expert Solution

Answer-

AMZN stock

Value of stock = V0 = $ 5000

Dividend paid in 6th year = D1 = $ 100

Dividends growh rate = g = 6 % = 0.06

Required return on equity = r

V0 = D1 / ( r - g)

$ 5000 = $ 100 / ( r - 0.06)

r - 0.06 = $ 100 / $ 5000

r - 0.06 = 0.02

r = 0.02 + 0.06

r = 0.08

r = 8 %

The rate of return on equity = 8 %

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