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25 January, 14:22

Ivonne has bought shares of RIO, Inc. stock for $25.00 per share. She expects a 1.00 dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to sell the stock for $28.75. What is Ivonne's required rate of return

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  1. 25 January, 14:41
    0
    24%

    Explanation:

    D1 = $, D2 = $1.25

    P0 = $25

    CF2 = $28.75

    r = ?

    Use the expected cash flows model

    D1 will be expected cash flow in year 1

    D2 wiill be expected cash in year 2

    So in year 2 CF will be $1.25+$28.75 = $30

    R in year 1 = 1/25 = 4%

    R year 2 = 30-25/25 = 20%

    therefore return is 24%

    =
  2. 25 January, 14:42
    0
    24%

    Explanation:

    Present value of stock: $25

    Cash flow in year 1: $1.00

    -> return in year 1 = $1.00 / $25 = 4%

    Cash flow in year 2: $1.25 + $28.75 = $30

    -> return in year 2 = ($30-$25) / $25 = 20%

    Required rate of return in 2 years = return in year 1 + return in year 2

    = 4% + 20% = 24%
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