Two companies, both equity financed with no debt, are in the same business. One company has a stable earnings and dividend record, paying out all its earnings in dividends. The other company is a growth stock increasing its earnings and dividends annually. Dividend is $5/share for both companies. Stable company trades at $40/share. The growth company trades at $50/share. 

Estimate investors' required rate of return on these stocks and the steady future growth rate of the growing company as perceived by the market.

Answer rating: 100% (QA)

To estimate investors required rate of return also known as the discount rate or cost of equity and ... View the full answer