Answer:
a. Expected rate of return = 10%
b. Expected rate of return = 12%
Explanation:
Using dividend growth model we have,
[tex]P_0 = \frac{D_1}{K_e - g}[/tex]
where P[tex]_0[/tex] = Current market price
D[tex]_1[/tex] = Dividend at the year end
K[tex]_e[/tex] = Expected return
g = growth rate
Putting values in the above we have,
a. $64 = [tex]\frac{4.5}{K_e - 0.03}[/tex]
[tex]K_e - 0.03[/tex] = [tex]\frac{4.5}{64} = 0.07[/tex]
K[tex]_e[/tex] = 0.07 + 0.03 = 0.1 = 10%
b. $64 = [tex]\frac{4.5}{K_e - 0.05}[/tex]
[tex]K_e - 0.05[/tex] = [tex]\frac{4.5}{64} = 0.07[/tex]
K[tex]_e[/tex] = 0.07 + 0.05 = 0.12 = 12%
Final Answer
a. Expected rate of return = 10%
b. Expected rate of return = 12%