You\'ve collected the following information from your favorite financial website

Question

You've collected the following information from your favorite financial website Requirement 1: Using the dividend yield, calculate the closing price for Candy Galore on this day (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Requirement 2: Assume the actual closing price for Candy Galore was $32 36 Your research protects a 4 50 percent dividend growth rate for Candy Galore What is the required return for the stock using the dividend discount model and the actual stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g.. 32.16).)

Explanation / Answer

Requirement 1.

Calculation of Closing Price According to Dividend Yield for Candy Galore:

Dividend Yield = Dividend Per Share / Price Per Share

Given, Dividend Yield = 1.5%, Dividend Per Share = $0.49

1.5% = 0.49 / X

X = 32.67 or Stock Price = $32.67

Requirement 2.

Formula of Dividend Discount Model = Stock Price = D1 / r - g

D1 = Dividend For the Next Year, r = Required Rate of Return, g = Growth Rate

Given, Stock Price = 32.36, Growth Rate = 4.50%, D1 = 0.49 x 104.50 / 100 = 0.51205

By putting Value in the Formula: 32.36 = 0.51205 / X - 0.045

X = 2.91%

So, the Required Return = 2.91%

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