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 77.9 10.48 Palm Coal .41 2.8 6 14.40 –.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 35.00 20.74 Candy Galore .32 1.5 28 ?? .18 According to your research, the growth rate in dividends for Palm Coal for the previous 10 years has been 3.75 percent. If investors feel this growth rate will continue, what is the required return for Palm Coal stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Solution

We need to find the required return of the stock.

Using the constant growth model, we can solve the equation for R.

R= (D1/ P0) + g

R= [$.41*(1 + 0.0375) / $14.40] + (.0375)

R= 0.067, or 6.70%