Final answer:
The required rate of return on equity cannot be calculated solely based on the information provided. The ROE gives some insight, but additional data such as risk-free rate, market return, or stock beta is needed for models like the dividend discount model or CAPM.
Step-by-step explanation:
To calculate the required rate of return on equity using the given information, we consider the formula that links the return on equity (ROE) to earnings and dividends. The firm has a net income of $1.5 billion and a dividend payout ratio of 40%. The dividend payout ratio indicates the proportion of earnings paid out as dividends to shareholders, and the remaining 60% is retained by the company. Given a ROE of 7%, the company's earnings are what generate this return on the shareholders' equity.
However, the question you've asked is about finding the required rate of return on equity. This can be calculated using the dividend discount model (if dividends are assumed to grow at a constant rate) or the Capital Asset Pricing Model (CAPM), among other methods. Typically, the company's return on equity (7% in this case) is a starting point to estimate the required return, but investors would normally require a higher return for bearing risk.
The Price-Earnings Ratio (P/E) of 20 and leverage ratio of 4 do not directly give us the required rate of return but can provide insight into the company's valuation and financial structure. Investors often compare the ROE to the required rate of return to decide if a stock is a good investment. If the ROE is lower than the required rate of return, investors may consider the stock to be a less attractive investment.