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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from Finance 101: Principles of FinanceChapter 14 / Lesson 3