Tattletale News Corp. has been growing at a rate of 10% per year, and you expect
ID: 2772757 • Letter: T
Question
Tattletale News Corp. has been growing at a rate of 10% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $9. The discount rate is 21% and the steady growth rate after 3 years is 4%.
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 10% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $9. The discount rate is 21% and the steady growth rate after 3 years is 4%.
Explanation / Answer
Tattletale News Corp. has been growing at a rate of 10% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $9. The discount rate is 21% and the steady growth rate after 3 years is 4%.
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.)
Current Stock price = D1/(1+r) + D2/(1+r)^2+ D3/(1+r)^3+ (D4/(r-g))/(1+r)^3
Current Stock price = 9*1.10/1.21+ 9*1.10^2/1.21^2 + 9*1.10^3/1.21^3 + (9*1.10^3*1.04/(21%-4%))/1.21^3
Current Stock price = $ 63.75
Stock price in year 1 = D2/(1+r)^1+ D3/(1+r)^2+ (D4/(r-g))/(1+r)^2
Stock price in year 1 = 9*1.10^2/1.21 + 9*1.10^3/1.21^2 + (9*1.10^3*1.04/(21%-4%))/1.21^2
Stock price in year 1 = 67.24
Capital gain = 67.24- 63.75
Capital gain = $ 3.49
Calculate the expected rate of return. (Do not round intermediate calculations. Round your answer to the nearest whole percent.)
Expected rate of return = (Capital gain+ Expected Dividend) /Current Stock price
Expected rate of return = (3.49 + 9*1.10)/63.75
Expected rate of return = 21%
Tattletale News Corp. has been growing at a rate of 10% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $9. The discount rate is 21% and the steady growth rate after 3 years is 4%.
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