Question

A firm pays a $11.80 dividend at the end of year one (D1), has a stock price of $145, and a constant growth rate (g) of 4 percent. Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

The required rate of return is 12.13%

Step-by-step explanation:

According to the DDM model, the formula for a price of a stock is

P=D1/R-G

D1= Year end dividend

P= Stock price

R= required rate of return

G= Growth rate of stock

SO we will input the values given to us in the question, in this formula.

145=11.80/(R-0.04)

145R - 5.8=11.80

145R= 17.6

R=17.6/145

R=0.121

R= 12.13%