Question

Dividends are equal to $5, and the current share price is $50. Dividends are expected to grow at 2% forever. According to the dividend growth model, what is the investor’s required rate of return?

Answer 1

Required rate of return = 12.2%

Step-by-step explanation:

According to the dividend growth model the price of a stock is

D*(1+G)/R-G

D= dividend

G=growth

R= Required rate of return

In order to find the required rate of return we will put the values given to us in the question into the formula.

D=5

G=2%

Price = $50

50=5*(1+0.02)/R-0.02

50R-1=5.1

50R=5.1+1

50R=6.1

R=6.1/50

R=0.122=12.2%