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Homework answers / question archive / The common stock of Cranberry, Inc

The common stock of Cranberry, Inc

Finance

The common stock of Cranberry, Inc. is selling for $26.75 on the open market. Adividend of $3.00 is expected to be distributed and the 5.5#. If Richard Dean an average investor, is considering purchasing this stock at the market price, what is his expected

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Answer-

Selling price of stock = V0 = $ 26.75

Expected dividend to be distributed = D1 = $ 3.68

Expected growth rate = g = 5.5 % = 0.055

Expected rate of return = r = ?

V0 = D1 / ( r - g)

$ 26.75 = $ 3.68 / ( r - 0.055)

r - 0.055 = $ 3.68 / $ 26.75

r - 0.055 = 0.1376

r = 0.1376 + 0.055

r = 0.1926

r = 19.26 %

The expected rate of return = 19.26 %

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