Mind-The-Gap Corp. is selling for $30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was $1.00 and the last dividend was $2.00. 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 = $2 is the most recent dividend and PV = $1 is the initial dividend and n = 10, we get g = - 1 = - 1 = 1.071773 - 1 = 0.071773, or about 7.18%. OR: One could use the TVM keys with N = 10, PV = -$1, FV = $2, and PMT = 0 to get I/Y = 7.1773% or about 7.18%. To get the expected return (r), we use the formula: r = + g. Inserting our values, we get: r = + 0.071773 = 0.143225, or about 14.32%.
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