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    mr.harold's Avatar
    mr.harold Posts: 2, Reputation: 1
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    #1

    Dec 11, 2009, 04:00 PM
    rate of return dividend
    McKracken roofing Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to at a rate of 5% per for the foreseeable future.

    What required rate of return for this stock would resut in a price per share of $28?

    And Please show me the equation you used to find the answer, please.
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Dec 12, 2009, 06:49 AM
    The model for pricing an asset under a 'constant growth' scenario--in which the cash flows are expected to grow at a constant rate indefinitely--is...



    where is the asset's price at some time n; the numerator is the cash flow (dividend, in the case of a stock share) expected to occur one period after the valuation date; and r and g are the discount rate and the constant growth rate, respectively.

    You'll need to solve for r with set to 28. Be careful with the dividend portion of the model. You need to use this year's dividend, not last year's. (That's assuming that last year's was paid pretty recently, and this year's is still a year or so away. That seems to be the common assumption when the question's worded the way yours is.)
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