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Common stock value-Constant growth McCracken Roofing, Inc., common stock paid a dividend of $1.49 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of $26? b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $26?

Common stock value-Constant growth McCracken Roofing, Inc., common stock paid a dividend of $1.49 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of $26? b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $26?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Common Stock Value—Constant Growth** McCracken Roofing, Inc., common stock paid a dividend of $1.49 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of $26? b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $26? --- **Answer** a. The required rate of return for this stock, in order to result in a price per share of $26, is [ ]%. (Round to two decimal places.)
Transcribed Image Text:**Common Stock Value—Constant Growth** McCracken Roofing, Inc., common stock paid a dividend of $1.49 per share last year. The company expects earnings and dividends to grow at a rate of 7% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of $26? b. If McCracken expects both earnings and dividends to grow at an annual rate of 11%, what required rate of return would result in a price per share of $26? --- **Answer** a. The required rate of return for this stock, in order to result in a price per share of $26, is [ ]%. (Round to two decimal places.)
Expert Solution
Step 1: Explain stock price

Price of the share is the PV of all future dividends discounted at the required return.  The formula for calculating the current stock price is 

P subscript 0 equals fraction numerator D subscript 1 over denominator r minus g end fraction W h e r comma P subscript 0 equals C u r r e n t space s t o c k space p r i c e D subscript 1 equals E x p e c t e d space d i v i d e n d r equals R e q u i r e d space r e t u r n g equals G r o w t h space r a t e


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