Steady As She Goes, Inc., will pay a year-end dividend of $2.50 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.

Steady As She Goes, Inc., will pay a year-end dividend of $2.50 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.

a.	If the stock currently sells for $25 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations.)

Expected rate of return

%

b.	If the expected rate of return on the stock is 16.5%, what is the stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Stock price

$

Explanation:

a.

P0 = DIV1/(r − g)

$25 = $2.50/(r − 0.04)r = 0.14 = 14%

b.

P0 = $2.50/(0.165 − 0.04) = $20.00