Question

For stock a, find out the required rate of return if the current year's dividend is $1.5, expected dividend growth is 2.5% and the value of the share is $25.

Answer 1

The required rate of return for stock A can be found using the Gordon Growth Model, which calculates this return based on the current dividend, growth rate of the dividend, and the stock price. For stock A, the required rate of return is 8.5%.

Step-by-step explanation:

The student is asking how to find the required rate of return on a stock given the current dividend, expected dividend growth rate, and the current share price. The formula used to calculate this is the Gordon Growth Model (also known as the Dividend Discount Model).

The formula is:

Required Rate of Return = (Dividend Payment / Stock Price) + Dividend Growth Rate

In this case:

• Dividend Payment (D1) = $1.5
• Stock Price (P) = $25
• Dividend Growth Rate (g) = 2.5%

The calculation would be:

Required Rate of Return = ($1.5 / $25) + 0.025

Required Rate of Return = 0.06 + 0.025

Required Rate of Return = 0.085 or 8.5%

The required rate of return for stock A is 8.5%.