Tattletale News Corp. has been growing at a rate of 20% per year, and you expect

Question

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $12. The discount rate is 25% and the steady growth rate after 3 years is 3%. a. What is the capital gain in stock price from year O to year 1 (Do not round intermediate calculations. Enter your answer as a dollar amount rounded to 3 decimal places.) Capital gain b. Calculate the expected rate of return. (Do not round intermediate calculations. Round your answer to the nearest whole percent.) Expected rate of return

Explanation / Answer

a. Price at year 0:

Price at year 0 = 82.90

after 1 year:

Price after 1 year = 89.23

capital gain = 89.23/82.90 - 1 = 7.64%

b. expected rate of return = 7.64% + 14.4/82.90 = 25.01%

25.00% Cash flows Year Discounted CF                            -   0 0.00                     14.40 1 11.52                     17.28 2 11.06                     20.74 3 10.62                     97.08 3 49.71

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