A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $

Question

A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $155 (P0), and a constant growth rate (g) of 10 percent. a. Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Rate of return % Indicate whether each of the following changes will increase or decrease the required rate of return (Ke). (Each question is separate from the others That is, assume only one variable changes at a time.) No actual numbers are necessary. b. If the dividend payment increases: c. If the expected growth rate increases: d. If the stock price increases:

Explanation / Answer

Answer:a P0=D1/(Ke-g)

$155=$1.50/(Ke-0.10)

155 Ke-$15.5=$1.50

Ke=10.97%

Answer:b If the dividend payment increases, the dividend yield (D1/P0) will go up, and the required rate of return (Ke) will also go up.

Answer:c If the expected growth rate (g) increases, the required rate of return (Ke) will go up.

Answer:d If the stock price increases, the dividend yield (D1/P0) will go down, and the required rate of return (Ke) will also go down.

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