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Q5B

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Essentials Of Investments
Found in: Page 436
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Jand, Inc., currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is $32.03, what is the required rate of return?

8.9994%

See the step by step solution

Step by Step Solution

Step 1: Given information

V0 = $32.03

D0 = $1.22,

g = 5%

k = ?

Step 2: Calculation of required rate of return

Intrinsic Value V0 = D0 x (1 + g) / (k – g)

$32.03 = $1.22 x 1.05 / k – 0.05

k = 0.089994

= 8.9994%

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