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12 October, 12:40

California Fishing Company (CFC) is expected to pay a dividend next year of $50 per share. Future Dividends for CFC are expected to grow at a rate of 5% per year indefinitely. If an investor is currently willing to pay $500 each CFC share, what is the investor's required return for this investment?

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  1. 12 October, 12:43
    0
    15% is the return of investment

    Explanation:

    The calculation is as follows:

    Price of stock = Dividend to be paid next year / (Required rate of return - growth in dividend)

    $500 = $50 / (Required rate of return - 5%)

    500 * Required rate of return - (500 * 0.05) = 50

    Required rate of return = 75/500 = 0.15

    Thus, 15% is answer.
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