Final answer:
Based on the Gordon Growth Model, the required rate of return (Ke) for the given stock is 7.80%, calculated using the provided dividend of $1.40, share price of $50, and constant growth rate of 5%.
Step-by-step explanation:
To calculate the required (expected) rate of return (Ke) for a stock with a constant growth rate (g), we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model states that the current price of a stock (P0) is equal to the dividend at the end of year one (D1) divided by the difference between the required rate of return (Ke) and the constant growth rate (g).
In the given scenario, the dividend at the end of year one is $1.40, the share price is $50, and the constant growth rate is 5%. Inserting these values into the formula we have:
P0 = D1 / (Ke - g)
Plugging in the given values gives us:
50 = 1.40 / (Ke - 0.05)
Now we can solve for Ke:
50(Ke - 0.05) = 1.40 => 50Ke - 2.5 = 1.40 => 50Ke = 3.9 => Ke = 3.9 / 50 => Ke = 0.078 or 7.80%
This means the required rate of return based on the Gordon Growth Model is 7.80%, which is the correct answer for this question. The initial question mentioning a rate of 2.95% appears to be incorrect based on the provided data.