Question

(Common stock valuation) The common stock of NCP paid $1.25 in dividends last year. Dividends are expected to grow at an annual rate of 5.90 percent for an indefinite number of years. a. If NCP's current market price is $24.97 per share, what is the stock's expected rate of return? b. If your required rate of return is 7.9 percent, what is the value of the stock for you? c. Should you make the investment? a. If NCP's current market price is $24.97 per share, the stock's expected rate of return is%. (Round to two decimal places) b. If your required rate of return is 7.9 percent, the value of the stock would be S (Round to the nearest cent) C. You should the stock because the expected rate of return is your required rate of return or the value of the stock is the current market price. (Select from the drop-down menus.)

Answer 1

(A)

Dividend paid last year = $1.25

Expected growth rate of dividend = 5.90%

Expected dividend for this year = $1.25 x (1+ 5.9%) = $1.32375

Current Market price of stock = $24.97

Stock's expected rate of return = (Expected dividend / Current Market price) x 100 = ($1.32375 / $24.97) x 100 = 5.30%

(B)

Required Rate of return = 7.9%

Let the value of stock be 'x'

7.9% of x = Expected dividend

x= $1.32375 x (100/7.9) = $16.76

(C)

No, the investment should not be made as the expected rate of return is lesser than the required rate of return.