Purchase Solution

Rate of Return

Not what you're looking for?

Ask Custom Question

Company stock sells for 200 pesos per share and next year's dividend is 8.5 pesos. Security analysts are forecasting earnings growth of 7.5% per year for the next 5 years.

a. Assume that earnings and dividends are expected to grow at 7.5% in perpetuity. What rate of return are investors expecting?

b. The company has generally earned about 12% on book equity (roe = .12) and paid out 50% of earnings as dividends. Suppose it maintains the same roe and payout ratio in the long-run future. What is the implication for g? For r? Should you revise your answer to part (a) of this question?

Purchase this Solution
Solution Summary

The solution explains how to calculate rate of return and impact growth rate can have on stock prices.

Solution Preview

a. Price = Next year Div/(r-g)

Here Price = 200
Next year Div = 8.5
g = .075
Thus putting these values in the above formula we ...

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Basics of corporate finance

These questions will test you on your knowledge of finance.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

View More Free Quizzes
Related BrainMass Solutions

  • Rate of return, growth rate, return on equity

    rate of return = $2.7016 Required rate of return = .087148 Required rate of return = 8.71 percent b.

  • 5-2 You purchase 100 shares of stock for $40 a share. The st

    (b) Rate of return = ((40-40) + 2) ÷ 40 = .05 = 5% Real rate of return = ((1+.05) ÷ (1+.03))-1 = (1.05/1.03)-1 = 1.01941-1 = 0.01941 = 1.94% (c) Rate of return = ((44-40) + 2) ÷ 40 = 0.15 = 15% Real rate of return = ((1+.15) ÷ (1+.03))-

  • How to calculate - Rate of Return, CAPM

    112953 How to calculate - Rate of Return, CAPM 1. Required rate of return: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent.

  • Stock questions

    What is the required rate of return on a stock with a beta of 0.7? 8- 5 BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk- free rate is 7%, and the market risk premium is 4%. a. What is the stock's beta? b.

  • Finance-Related Problems: Bonds and Returns

    rate of return = nominal return rate - inflation rate (note: this is an approximation) a) when inflation = 2%, real rate of return = 6% - 2% = 4% b) when inflation = 4%, real rate of return = 6% - 4% = 2% c) when inflation = 6%, real rate of

  • Stocks : Required Rate of Return and Expected Return

    235871 Determining Required Rate of Return and Expected Return: Example A stock has a beta of 1.5, the market risk premium is 9%, and the risk-free rate is 5%. a. What is the required rate of return on this stock? b.

  • Nominal Versus Real Rate of Return on Bonds

    The real rate of return is the rate of return after taking into account the effects of inflation. If R is the nominal rate of return, r is the real rate of return and H is the rate of inflation, 1+R=(1+r)*(1+H).

  • Using the Security Market Line (SML), what is Bertin's required rate of return?

    304848 Using the SML, what is Bertin's required rate of return? Bertin Bicycles has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%.

  • Ranking by the Internal Rate of Return Method

    of return and compare with each project's expected rate of return.

  • Rate of return

    264866 Rate of Return using the CAPM A stock has a beta of 1.6, the risk free rate is 4% and the expected market return is 10%. What is the required rate of return using the CAPM model?

View More Related Solutions