You’ve collected the following information from your favorite financial website.
ID: 2751642 • Letter: Y
Question
You’ve collected the following information from your favorite financial website.
According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 4.00 percent.
If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Required Return _____%
52-week price Hi Lo Stock (Div) Div Yld % PE Ratio Close Price Net Chg 79.2 10.61 Palm Coal 0.54 3.4 6 15.7 -0.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 -0.01 130.93 69.5 SIR 2.00 2.2 10 88.97 3.07 50.24 13.95 DR Dime 0.80 5.2 6 15.43 -0.26 35 20.74 Candy Galore 0.32 1.5 28 ?? 0.18Explanation / Answer
We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R . Doing so, we find
R = (D 1 / P 0 ) + g
=0.54(1+0.04)/15.7 +0.04
= 7.57%
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