Common stock valuation You intend to purchase Dorchester com

(Common stock valuation) You intend to purchase Dorchester common stock at $48.50 per share, hold it for 1 year, and then sell it after a dividend of $6.50 is paid How much will the stock price have to appreciate for you to satisfy your required rate of return of 17 percent? The stock price have to appreciate %. (Round to two decimal places.)

Solution

Holding Period or Required Rate of Return = 17%

Based on Mathematical relation,

Required Return = (Final Price - Initial Price + Dividend)/Initial Price

17% = (Final Price - 48.5 + 6.5)/48.5

Final Price = 50.245

Hence, % appreciation required = (50.245 - 48.5)/48.5 = 3.60%