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    Required Rate of Returns and Dividend Growth Rate

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    1. ABC stock is selling for $100 per share today. It is expected the stock will pay a dividend of $5 one year from now, & then be immediately sold for $120 per share. What is the expected rate of return for shareholders?

    2. XYZ regularly pays dividends & is expected pay a dividend of $3 per share one year from now. Dividends are then expected to grow at a constant rate of 2.5% forever. The current stock price is $24 per share. What is ther required rate of return?

    3. DCF regularly pays out 1/3 of its earnings as dividends. It's return on equity is 15%. What is the stable dividend growth rate?

    4. LMN has just paid a dividend of $1 per share. The dividends are expected to grow at a rate of 20% per year for the next 3 years, and then 5% per year thereafter. If the required rate of return of the stock is 15%, what is the current value of the stock?

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    Solution Preview

    Returns
    1. ABC stock is selling for $100 per share today. It is expected the stock will pay a dividend of $5 one year from now, & then be immediately sold for $120 per share. What is the expected rate of return for shareholders?

    Assume that the shareholders purchase at $100 per share.
    Expected rate of return = (Dividend + Price of share sold- Purchase Price) /Purchase Price
    = (5 + 120 - 100)/100
    = 25%

    2. XYZ regularly pays dividends & is expected pay a dividend of $3 per share one year from now. Dividends are then expected to grow at a constant rate of 2.5% forever. The current stock price is ...

    Solution Summary

    This solution is comprised of a detailed explanation to find the required rate of return, stable dividend growth rate, and current value of the stock.

    $2.19