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Consider a stock that pays a dividend of $20. Dividends areexpected to grow at 7% per year and the stock is currently priced at $713.i) What must the expected return on the stock be for investors to purchase it at thisprice?

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hyderali230

Answer:

Expected return on stock is 9.81%

Explanation:

We use Dividend Growth method to calculate the stock price based on the dividend paid, its growth rate and required rate of return.

The formula for the stock price is as follows

Price of share = D0 / (Rate of return - Growth rate)

$713 = $20 / ( rate of return - 7%)

Rate of return - 7% = $20 / $713

Rate of return - 7% = 2.81%

Rate of return = 2.81% + 7%

Rate of return = 9.81%

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