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Ecolap Inc. (ECL) recently paid a $1.26 dividend. The dividend is expected to grow at a 20.16 percent rate. At a current stock price of $60.72, what return are shareholders expecting?

Answer :

Answer:

Expected return will be 22.65 %

Explanation:

We have given recently paid dividend = $1.26

Growth rate g = 20.16 %

Current stock price [tex]P_0=60.12[/tex] $

Next year dividend [tex]D_1=D_0(1+g)=1.26\times (1+0.2016)=1.26\times 1.2016=1.514[/tex]

We have to find the expected return [tex]K_e[/tex]

We know that current stock price is equal to [tex]P_0=\frac{D_1}{K_e-g}[/tex]

[tex]60.72=\frac{1.514}{K_e-0.2016}[/tex]

60.72 [tex]K_e[/tex] - 12.241 = 1.514

60.72 [tex]K_e[/tex] = 13.755

[tex]K_e[/tex] = 0.2265 = 22.65 %

So expected return will be 22.65 %

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