his Question: 1 pt 9 of 10 (0 complete) This Qs Common stock value Constant grow
ID: 2615952 • Letter: H
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his Question: 1 pt 9 of 10 (0 complete) This Qs Common stock value Constant growth McCracken Rooting, Inc, common stock paid a dverdofS1 21 per share The oompany expeds earings and d de togrow-arale of ?% per year he foreseeable lthre ast ye" reored rate of rehum would res napre per garrofer places) What required rate of return for this stock would nesutin a price per share of $227 "Mc0acken expects both earings and dvdends to gow at an annual rate ot what The reqired rate of returm tor this stock,in order to resut in a price per share of $22, Round to two dom (Randtobwodeomupace.) oored eam o' rehmfor nn stoc?norow toresunin.price per shareofS22, "?%Explanation / Answer
Using Gordon Growth Model
P0 = D1 / (Ke-g)
Where
P0 - Current Market Price
D1 - Expected next year dividend
Ke - rate of return
g - growth rate
a) P0 = D1 / (Ke-g)
22 = (1.21*1.06) / (Ke-.06)
22 = 1.2826 / (Ke-.06)
22Ke-1.32 = 1.2826
22Ke = 2.6026
Ke = .1183 = 11.83%
b) P0 = D1 / (Ke-g)
22 = (1.21*1.11) / (Ke-.11)
22Ke-2.42 = 1.3431
22Ke = 3.7631
Ke = .17105 = 17.105% = 17.11%
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