# Rate of Return

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?

© BrainMass Inc. brainmass.com June 3, 2020, 9:37 pm ad1c9bdddfhttps://brainmass.com/business/modified-internal-rate-of-return/rate-return-impact-growth-rate-stock-prices-191867

#### 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 ...

#### Solution Summary

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