The company in the question above also has common shares ava

The company in the question above also has common shares available for $50 each. Analysts expect the shares to pay a $3 annual dividend for the next 3 years, and one experienced analyst believes the shares will be worth at least $60 at the end of that period. If your personal MARR is 8%, what is the ERR of this investment for you?

Solution

Today\'s rate of stock=$50

PV of Dividends = $3*(1/1.08)^1+3/1.08^2+3/1.08^3

End value of stock= 60

PV of end value= 60/1.08^3=

Expected rate of return= (PV of end value+ PV of Dividends- Current value stock)/Current value stock=(47.63+7.72-50)/50=5.35/50=10 7%

ERR=10.7%