Question #28
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 13
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Given that a firm's current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm's shares is $54.50, what is the required rate of return?
Answer Choices:
A. 10%
B. 9%
C. Can’t be determined
Explanation
The equation to determine the required rate of return is solved through iteration.
$54.50 = $2(1.07) / (1 + r) + $2(1.07)2 / (1 + r)2 + {[$2(1.07)2(1.05)] / (r - 0.05)} / [(1
+ r)2
Through iteration, r = 9%