A firm pays a $2.50 dividend at the end of year one ( D 1 ), has a stock price o

Question

A firm pays a $2.50 dividend at the end of year one (D1), has a stock price of $133 (P0), and a constant growth rate (g) of 7 percent.

Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

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.

A firm pays a $2.50 dividend at the end of year one (D1), has a stock price of $133 (P0), and a constant growth rate (g) of 7 percent.

Explanation / Answer

a)Stock price=d1/(K-g)
D1=2.5 g=7% stock price=133
133=2.5/(k-7%)
k=8.88%

b)Ke=(D1/p)+g
If the dividend payment increases,the return will increase since the numerator increase

c)If the expected growth rate increases, the return will increase
d)If the stock price increases, then return will decrease since denominator increases

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