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

Question

Jace Guerra

Business

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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Giselle Melendez · Answer 1

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%