Famous Antiquities Inc. is selling for $48 per share. In looking at the stream of dividends over the past seven years, you find out that the first dividend was $0.50 and the last dividend was $3.85. What is the firm's growth rate of dividends?
What is the firm's expected return?
What will be an ideal response?
Answer:
Using the formula g = - 1, where FV = $3.85 is the most recent dividend and PV = $0.50 is the initial dividend and n = 7, we get g = - 1 = ($3.85/$0.50)^(1/7) - 1 = 1.3385714 - 1 = 0.3385714, or about 33.86%. OR: One could use the TVM keys with N = 7, PV = -$0.50, FV = $3.85, and PMT = 0 to get I/Y = 33.8571% or about 33.86%. To get the expected return (r), we use the formula: r = + g. Inserting our values, we get: r = ($3.85 * 1.3386)/$48 + 0.3386 = 0.10737 + 0.3386 = 0.44597, or about 44.60%.
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