a stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1=$4), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 14%. If markets are efficient, what is your forecast of g?

Question

anonymous · Answer

Total required return in dollar terms = Required rate of return * Current stock price = 14% * $80 = $11.20
Required appreciation in stock price = Total required return (in dollars) - Return in the form of dividend = $11.20 - $4 = $7.20
g = Required appreciation in stock price/Current stock price = $7.20 / $80 = 9%