Question

Arcadia Bluffs is expected to maintain a constant 1.5 percent growth rate in its dividends indefintely. If the company has a dividend yleld of 3.6 percent, what is the required return on the company's stock?

Answer 1

The required return on Arcadia Bluffs stock is (D * 0.015) / (0.036 * P).

Step-by-step explanation:

To calculate the required return on a stock, we need to use the dividend yield formula. The dividend yield is the annual dividend payment divided by the stock price. In this case, the dividend yield is 3.6 percent. Let's denote the required return as R, the annual dividend as D, and the stock price as P.

1. Dividend Yield = Dividend / Stock Price
2. 3.6% = D / P

Since we know that the company's dividends are expected to grow at a constant rate of 1.5 percent, we can use the dividend growth formula.

1. Growth Rate = Dividend Growth Rate
2. 1.5% = D * 0.015

Now, we can substitute the value of D in the dividend yield formula with the value obtained from the dividend growth formula.

1. 3.6% = (D * 0.015) / P

Finally, we can rearrange the formula to solve for the required return:

1. R = (D * 0.015) / (0.036 * P)

So, the required return on the company's stock is (D * 0.015) / (0.036 * P).