McCracken Roofing, Inc, common stock paid a dividend of $1.04 per share last year. The company...

Question:

McCracken Roofing, Inc, common stock paid a dividend of $1.04 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future.

a. What required rate of return for this stock would result in a price per share of $22?

b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $22?

Dividend Discount Model:

The dividend discount model can be used to value a company's stock. It uses the assumption that a stock's price is worth the present value of all its future dividends.

Answer and Explanation:

A. The required rate of return for the stock is 12.06%

To calculate, we use the dividend discount model where Div(1) = the present year expected...

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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