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25 April, 05:19

A firm just paid a dividend of $6 per share. Next year the dividend is expected to grow 8 percent, thereafter 10 percent forever. The present share price is $36. Calculate the required rate of return on the firm's equity. Express the response in decimal format

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  1. 25 April, 05:39
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    26%

    Explanation:

    MV=Do (1+g) / (Ke-g)

    Where MV is market value=$36

    Do is current dividend per share=$6

    g is growth rate=8%

    Ke=?

    By putting above values we get;

    36=6 (1+.08) / (Ke-.08)

    36Ke-2.88=6+.48

    36Ke=2.88+6+.48

    Ke=9.36/36

    Ke=26%
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Home » Business » A firm just paid a dividend of $6 per share. Next year the dividend is expected to grow 8 percent, thereafter 10 percent forever. The present share price is $36. Calculate the required rate of return on the firm's equity.
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