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?

Solution

Required return=(End price-Beginning price+Dividens)/Beginning price

0.17=(End price-48.5+6.5)/48.5

(0.17*48.5)=End price-42

End price=(8.245+42)

=$50.245

Hence appreciation required=(50.245-48.5)

=$1.745