Given that the beginning value on a stock is $530, expected earnings are $50, the dividend payout ratio is 40%, and the required rate of return is 14%, what is the minimum expected ending value of the stock that makes it a profitable investment?
Click on the arrows to vote for the correct answer
A. B. C. D. E.B
Expected dividends equal 50 x 0.4 = $20. In order for a stock to be a good investment, its rate of return should be equal to or greater than the required rate of return. The minimum ending value that would make the stock investment in this question profitable is given by the equation (P2 + D) / P1 = 1 + k, where P2 is the ending value, P1 is the beginning value, D is the expected dividend, and k is the required rate return. Rearranging this yield P2 = ((k + 1) x P1) - D. In this question, the minimum ending value is (1.14 x 530) - 20 = $584.20.