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 50.32 14.03 DR Dime .88 5.7 6 15.51 –.26 35.00 20.74 Candy Galore .32 1.5 28 ?? .18 According to your research, the growth rate in dividends for DR Dime for the previous 10 years has been negative 13 percent. If investors feel this growth rate will continue, what is the required return for DR Dime stock? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Solution

DR Dime If investors feel this growth rate will continue, what is the required return for DR Dime stock? We need to find the required return of the stock. Using the constant growth model, we can solve the equation for Doing so, we find: R = (D 1 / P 0 ) + g R = [$0.93(1 – 0.13) / $15.56] + (–0.13) R = –0.0780 or –7.80%