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30 October, 04:39

Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely. If the stock currently sells for $30 per share, what is the expected rate of return on the stock?

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  1. 30 October, 06:03
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    r = 14%

    Explanation:

    In order to calculate the price of a stock with indefinite dividend growth, we use the following formula:

    P = Year-end dividend / (r-g)

    P: Stock price

    r: Required rate of return (Missing value)

    g: Dividend growth rate (4%)

    We have:

    30 = 3 / (r - 0.04)

    --> r = 14%
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