A firm has a current price of $40 a share, an expected growth rate of 11 percent and expected dividend per share (D1) of $2

Accounting Aug 13, 2020

A firm has a current price of $40 a share, an expected growth rate of 11 percent and expected dividend per share (D1) of $2. Given its risk you have a required rate of return for it of 12 percent. Your expected rate of returnP

Expert Solution

Computation of the expected rate of return:-

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

= ($2 / $40) + 11%

= 5% + 11%

= 16%

Since, the expected rate of return is higher than the required rate of return (12%). So, it should be bought.

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