Question

Please solve the problem with details that I learn.

Finkle-McGraw Corp. just paid a dividend today of $2.60 per share. The dividend is expected to grow at a constant rate of 4.6% per year. If Finkle-McGraw Corp. stock is selling for $72.00 per share, what is the stockholders' expected rate of return? Submit your answer as a percentage and round to two decimal places.

Thank you,

Answer 1

The stockholders' expected rate of return is computed as shown below:

Stock selling price = Dividend just paid ( 1 + growth rate ) / ( expected rate of return - growth rate )

$ 72 = $ 2.60 ( 1 + 0.046 ) / ( expected rate of return - 0.046 )

$ 72 = $ 2.7196 / ( expected rate of return - 0.046 )

expected rate of return = $ 2.7196 / $ 72 + 0.046

expected rate of return = 8.38% Approximately

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