Ravi equity share currently sells for 23 per share. The company's finance manager anticipates a constant growth rate of 10.5% and an end of year dividend of 2.50
1. what is the expected rate of return?
2. if the investor requires a 17% return, should he purchase the stock?
Answers
1. The expected rate of return is
2. if the investor requires a 17% return, yes he should purchase the stock
Explanation:
1. The computation of the expected rate of return is shown below:
Expected rate of return = (End year of dividend) ÷ (Market price) + Constant growth rate
= ($2.50) ÷ ($23) + 10.5%
= 10.86% + 10.5%
= 21.37%
2. Now the value of stock would be
= (End year of dividend) ÷ (Required rate of return - constant growth rate)
= ($2.50) ÷ (17% - 10.5%)
= ($2.50) ÷ (6.5%)
= $38.46
As we can see that the value of stock is more than the market price which determines that the stock should be purchased
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Ravi equity share currently sells for 23 per share. The company's finance manager anticipates a constant growth rate of 10.5% and an end of year dividend of 2.50
1. what is the expected rate of return?
2. if the investor requires a 17% return, should he purchase the stock?
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