Question

27. Seven-Seas Co. Just paid a dividend of $3 per share out of earnings of $5 per share. If its book value per share is $40. 00 and its market price is $52. 50 per share, calculate the required rate of return on the stock

Answer 1

Based on the dividend, the the current price and the growth rate, the required rate of return is 11%.

What is the required rate of return?

This can be found by the formula:

= Next dividend / Current market price + Growth rate

Growth rate = EPS / Book value of share x (1 - Payout ratio)

= 5 / 40 x  (1 - 0.60)

= 5%

Next dividend = Current dividend x ( 1 + growth rate)

= 3 x 1.05

=$3.15

Required return is:

= 3.15 / 52.50 + 0.05

= 11%

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