Muller's Investigative Services has stock is trading at $75 per share

Finance Aug 09, 2020

Muller's Investigative Services has stock is trading at $75 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate, gL, throughout time. The stock's required rate of return is 12% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL?

Expert Solution

Computation of the forecast growth rate (gL):-

Required rate of return = (D1 / Current stock price) + Growth rate

12% = ($3 / $75) + Growth rate

Growth rate = 12% - 4%

= 8%

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