XYZ stock currently sells in the market for $8

Finance Mar 18, 2021

XYZ stock currently sells in the market for $8.50/share. It just paid a dividend of $0.30/share, and investors expect that the dividend will grow at a constant rate of 4% per year in the future. What rate of return do investors require on this stock?

Expert Solution

Answer:

PV = D1 / RR-DGR 8.5 = .312 / x - .04

.312 = 8.5 (x - .04)

.312 = 8.5x - .34

.652 = 8.5x

x = 7.67

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