Question

QUESTION 12

1. You've collected the following information from a financial web site.

   52-Week Price		Stock (Div)	Div Yld %	PE Ratio	Close Price	Net Chg
   Hi	Lo
   77.40	10.43	Palm Coal 0.36	2.6	6	13.90	–0.24
   56.56	34.17	Lake Lead Grp 2.29	5.6	10	41.18	–0.01
   130.93	69.50	SIR 2.00	2.2	10	88.97	3.07

   According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 4.31 percent. If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Required Return for Palm Coal Stock

Dividend in Next Year (D1)

D1 = D0 x (1 + g)

= $0.36 x (1 + 0.0431)

= $0.3755 per share

Here, we’ve Current Market Price (P0) = $13.90 per share

Dividend growth rate (g) = 4.31% per year

Dividend in year 1 (D1) = $0.3755 per share

Therefore, The Required Return = [D1 / P0] + g

= [$0.3755 / $13.90] + 0.0431

= 0.0270 + 0.0431

= 0.0701 or

= 7.01% (Rounded to 2 decima place)

“Hence, the required return for Palm Coal stock will be 7.01%”