Constant-Growth Model.?

Question

A stock sells for $40. The next dividend will be $4 per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?

This is what I have....

Discount Rate (r) = (Dividends (div)/Stock Price (po)) + Dividend Growth (g)

40% x 15% = 6% (g)

(4/40) + .06 = 16%

Discount Rate = 16%

Is this right?

Answer 1

i don't know whether the following answer is correct but at least can be as yours reference :

g = b(proportion earning return) X b (rate of new investment earning)

    =0.4 X 0.15

    = 0.06/6%

Ke = {D(1 + g)/Po} + g

      = {4(1 + 0.06)/40} + 0.06

      = 16.6%