You’ve collected the following information from your favorite financial website.

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 3.5 percent.
  
If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Required return             %

52-Week Price Stock (Div) Div
Yld % PE
Ratio Close
Price Net
Chg Hi Lo 79.0 10.59 Palm Coal .52 3.4 6 15.50 –.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –.01 130.93 69.50 SIR 2.00 2.2 10 88.97 3.07 50.24 13.95 DR Dime .80 5.2 6 15.43 –.26 35.00 20.74 Candy Galore .32 1.5 28 ?? .18

Explanation / Answer

Answer:

As the information about dividend, constant growth rate and price of share is available, we can use the constant growth model to find out the required return of the stock;

     P = D1 / (K-g)

     Or K – g = D1 / P

     Or K = (D1 / P) + g

            Here; D1 = D0 (1 + g)

So put the values to find out Required Rate of Return on Equity;

     K = [0.52 (1 + 0.035) / 15.50] + 0.035

     K = 0.03472 + 0.035

     K = 0.06972 or 6.972%

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