Youve collected the following information from your favorite

You’ve collected the following information from your favorite financial website. 52-Week Price Stock (Div) Div Yld % PE Ratio Close Price Net Chg Hi Lo 77.40 10.43 Palm Coal .36 2.6 6 13.90 –.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –.01 130.93 69.50 SIR 2.00 2.2 10 88.97 3.07 50.24 13.95 DR Dime .80 5.2 6 15.43 –.26 36.70 20.91 Candy Galore .49 1.5 28 ?? .18 Using the dividend yield, calculate the closing price for Candy Galore on this day. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price $ Assume the actual closing price for Candy Galore was $32.36. Your research projects a 4.5 percent dividend growth rate for Candy Galore. What is the required return for the stock using the dividend discount model and the actual stock price? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Solution

Candy Galore

52 week Stock Div ( D) = 0.49

Dividend yield = 1.5%

Let say the closing price = P

Dividend yield = (D/P)

So, D/P = 1.5%
or, 0.49/P = 1.5%
Solving the above equation, we get closing price P = (0.49/1.5%) = $32.67 (Answer 1st Part)

Now,

If the closing Price = P1 = $32.36,   last dividend = D = 0.49 Dividend growth = g = 4.5%
Let say the required return =r

Therefore, from Dividend Discount Model,

P1 = [D X (1+g)]/(r-g)

or, r - g = [D X (1+g)]/ P1

or, r = [D X (1+g)]/ P1 + g

Putting the value of D, g and P1 we get, required return r = 6.088% (Answer 2nd Part)