If you pay $55 for a share of common stock that has a constant growth rate...
If you pay $55 for a share of common stock that has a constant growth rate of 6% and it is expected to pay a dividend of $1.25 what would be your return?
Homework Answers
Given,
The price of the stock, P0 = $55.
Growth rate, g = 6% or 0.06.
Dividend expected, D1 = $1.25
Let, expected rate of return, r*
We know that, P0 = D1 / ( r* - g )
=> ( r* - g ) = D1 / P0 = 1.25/55 = 0.0227
=> r* = 0.0227 + g = 0.0227 + 0 06 = 0.0827
Therefore, r* = 0.0827 or 8.27%
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