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Chrome File Edit View History Bookmarks People Window Help * !" us. 100% E) Thu 8:17 PM Connect G Chegg Study | Guided Solutio/X Q Business Finance-ch. 3 Flasx × già Secure https://newconnect.mheducation.com/flow/connect.html Chapter 7 Review Questions G Help Save & Exit Submit Saved Check my work 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 $8. The discount rate is 19% and the steady growth rate after 3 years is 2%. 10 points 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 eBook Print References b. Calculate the expected rate of return. (Do not round intermediate calculations. Round your answer to the nearest whole percent.) Expected rate of return Reference links Mc Graw Hill Prev 16 of 23 Next >

Explanation / Answer

Last dividend paid was $8, and expects to grow at rate of 10% so

dividend next year DIV1 = $8*1.10 = $8.8

similarly DIV2 = $ 9.68

DIV3 = $ 10.648

stock price after 3 years

P3 = 10.648 * 1.02/(.19 - .02) = $63.89

P0 = 8.8/1.19 + 9.68/1.19^2 + (10.648 + 63.89)/1.19^3 = $58.46

P1 = 9.68/1.19 + (10.648 + 63.89)/1.19^2 = $60.77

Capital gain = P1 - P0 = $60.77 - $58.46 = $ 2.31

NOw

expected rate of return

r = (dividend + capital gain)/ price = (8.8+2.31)/58.46 = 19%

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