Tattletale News Corp. has been growing at a rate of 20% per year, and you expect

Question

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $6. The discount rate is 23% and the steady growth rate after 3 years is 3%.

What is the capital gain in stock price from year 0 to year 1? (Do not round intermediate calculations. Enter your answer as a dollar amount rounded to 3 decimal places.)

$   

Calculate the expected rate of return. (Do not round intermediate calculations. Round your answer to the nearest whole percent.)

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $6. The discount rate is 23% and the steady growth rate after 3 years is 3%.

a.

What is the capital gain in stock price from year 0 to year 1? (Do not round intermediate calculations. Enter your answer as a dollar amount rounded to 3 decimal places.)

  Capital gain

$   

b.

Calculate the expected rate of return. (Do not round intermediate calculations. Round your answer to the nearest whole percent.)

  Expected rate of return %

Explanation / Answer

D1=6*1.20=7.20

D2=6*1.20^2=8.64

D3=6*1.20^3=10.368

P3=(10.368*1.03)/(0.23-0.03)=53.3952

P0=7.20/1.23^1+8.64/1.23^2+(10.3680+53.3952)/1.23^3=45.83

P1=8.64/1.23+(10.3680+53.3952)/1.23^2=49.17

Capital gain=49.17-45.83=3.341

expected return=(3.341+7.20)/45.83=23%

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