Muller's Investigative Services has stock trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 5 $4), and it is expected to grow at some constant rate, g, throughout time. The stock's required rate of return is 14% (assume the market is in equilibrium with the required return equal to expected return). What is your forecast of g?

Question

Yasmin Tran

Business

29 September, 07:04

Muller's Investigative Services has stock trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 5 $4), and it is expected to grow at some constant rate, g, throughout time. The stock's required rate of return is 14% (assume the market is in equilibrium with the required return equal to expected return). What is your forecast of g?

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Zoey Herman · Answer 1

The forecast of growth is 9%

Explanation:

The dividend discount model is used to discount future dividends at the cost of equity to find the Value of the stock and is appropriate to use in this instance

SP = D1/r - g

What we have D1 $4, SP $80, r 14% we need to find the forecast of growth

Plug in the values in the formula

80 = 4 / 0.14 - g

80 (0.14-g) = 4

80 (0.14-g) / 80 = 4/80

0.14 - g = 4/80

-g = 4/80 - 0.14 = - 0.09

g = 0.09/9%