Question

An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32, assuming a constant growth rate of 4%. What is the required rate of return? Select one:

a. 10.3%
b. 10.1%
c. 8.1%
d. None of these

Answer 1

8.06%

Step-by-step explanation:

Use dividend discount model (DDM) to find the required rate of return;

r = (D1/P0)+g

whereby, D1= Next year's dividend = 2.32

P0 = Current price of the stock = 57.20

g = stock dividend's growth rate = 4% or 0.04 as a decimal

Next, plug in the numbers to the formula;

r = (2.32/57.20) + 0.04

r = 0.0406 + 0.04

r = 0.0806 or 8.06%

Therefore, the required rate of return is 8.06%