1. Leslie\'s Unique Clothing Stores offers a common stock that pays an annual di
ID: 2745978 • Letter: 1
Question
1. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.40 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 15.70 percent return on your equity investments?
2. The common stock of Eddie's Engines, Inc. sells for $28.71 a share. The stock is expected to pay $3.60 per share next year. Eddie's has established a pattern of increasing their dividends by 5.7 percent annually and expects to continue doing so. What is the market rate of return on this stock
1. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.40 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 15.70 percent return on your equity investments?
Explanation / Answer
1.
The price of the stock would be calculated as follows:
Annual dividend=$2.40,growth in annual dividends=0
Required rate of return=15.70%
The price would be=2.40/15.70%=$15.42
2.
price=28.71
Dividend next year=3.60
growth=5.70
price=Dividend/Re-growth
Hence,28.71=3.60/(Re-5.7%)
Thus,Re-5.7%=3.60/28.71=12.5%
Hence,Re=12.5%+5.7%=18.2%
Thus answer is 18.2%.
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