Concept explainers
Section 7.1 What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8 percent?
To determine: The total return for a stock.
Introduction:
Return is the minimum percentage an investor earns from the investment of stock in the market.
Stock is a type of security in a company which denotes ownership. On issuing stocks, the company can raise capital.
Answer to Problem 7.1C
The total return for a stock is 11.78%.
Explanation of Solution
Given information:
The current stock price is $50 and the currently paid dividends are $1.75. The constant growth rate is 8%.
The formula to calculate the dividend of next year (D1):
Where,
D1 refers to the dividend per share of next period,
Dorefers to the dividend just paid,
g refers to the constant growth of dividends.
The formula to calculate the required return:
Where,
R refers to the required return,
D1 refers to the dividend per share of next period,
Po refers to the present value of a share of stock,
g refers to the constant growth of dividends.
Compute the dividend of next year (D1):
Hence, the dividend of next year is $1.89.
Compute the required return:
Hence, the required return is 0.1178 or 11.78%.
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Chapter 7 Solutions
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