The Buckle (BKE) recently paid a $0.90 dividend. The dividend is expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the return shareholders are expecting?

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Quizplus · Accepted Answer

The expected return for shareholders, also known as the cost of equity, can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: $$r = \frac{D_1}{P_0} + g$$ where $r$ is the expected return, $D_1$ is the dividend expected next year, $P_0$ is the current stock price, and $g$ is the growth rate of the dividend. Given that the dividend just paid is $0.90 and is expected to grow at a 19 percent rate, the dividend expected next year, $D_1$, would be $0.90 \times (1 + 0.19) = $1.071. The current stock price, $P_0$, is $43.17, and the growth rate, $g$, is 19 percent or 0.19 in decimal form. Plugging these values into the formula gives: $$r = \frac{1.071}{43.17} + 0.19 = 0.0248 + 0.19 = 0.2148$$ or 21.48 percent.

The Buckle (BKE) Recently Paid a $0