Question

Columbus Manufacturing's stock currently sells for $ 23.57 a share. The stock just paid a dividend of $2 a share (i.e.,D0=2). The dividend is expected to grow at a constant rate of 6 % a year. What is the required rate of return on the company's stock? Express your answer in percentage, and round it to two decimal places, i.e., 13.54, for example for 0.1354)

Answer 1

Required rate of return is 14.99%

Step-by-step explanation:

Given:

Price of stock (Po)= $23.57

Dividend (Do) = $2

Growth rate (g)= 6% or 0.06

Using dividend growth model to calculate required rate of return:

`r=(d_(0)\left ( 1+g \right ))/(P_(o))+g`

Substituting values in above formula, we get:

r =
`r=(2\left ( 1.06 \right ))/(23.57)+0.06`

= 0.1499 or 14.99%

Therefore, required return of company's stock is 14.99%