Blackburn & Smith common stock currently sells for $24.50 per share. The company’s executives anticipate a constant growth rate of 10.6 percent and an end-of-year dividend of $1.50. a.What is your expected rate of return? b.If you require a return of 16 percent, should you purchase the stock?

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1.98K viewsJanuary 28, 2017

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Darshita 6.14K January 28, 2017 0 Comments

Blackburn & Smith common stock currently sells for $24.50 per share. The company’s executives anticipate a constant growth rate of 10.6 percent and an end-of-year dividend of $1.50.

a.What is your expected rate of return?

b.If you require a return of 16 percent, should you purchase the stock?

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score 0 · Answer 1 · 2017-01-28T05:04:27+00:00

Answer

a.

Expected Return

=Dividend year -1 /markate rate + growth rate

Now put the figures in to the equation as under

Expected Return

=(1.50/24.50) +0.106

=0.061222+0.106

=01672 =16.72%

Expected return=16.72%

b

The expected rate of return exceeds your required rate of return, which means that the value of the security to you is greater than the current market price. Thus, you should buy the stock

.

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