Ecolap Inc ECL recently paid a 032 dividend The dividend is

Ecolap Inc. (ECL) recently paid a $0.32 dividend. The dividend is expected to grow at an 11.50 percent rate. The current stock price is $41.32.

What is the return shareholders are expecting? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Solution

This question is based on the concept of Constant Growth Dividend Discount Model.

As per Constant Growth Dividend Discount Model the dividends will grow at a constant rate forever.

We will use the formula - Price of stock = D1 / (Re - g)

Where D1 is the dividend for year 1

Re is return to shareholders

g is growth

Note - In the question it states that \"Ecolap Inc. (ECL) recently paid a $0.32 dividend\" which means this is current dividend or D0.

Step 1 - Calculation of D1

D1 = D0 * (1 + g)

D1 = $0.32 * (1 + .1150)

D1 =  $0.32 * 1.1150

D1 = $0.3568

Step 2 - Calculation of return to shareholders

Price of stock = D1 / (Re - g)

41.32 = 0.3568 / (Re - 0.1150)

41.32Re - 4.7518 = 0.3568

41.32Re = 0.3568 + 4.7518

41.32Re = 5.1086

Re = 5.1086 / 41.32

Re = .1236 or 12.36% (rounded to 2 decimal places)

Therefore the Return shareholders are expecting is 12.36%