Question

A company issues a $1.25 per share dividend every year. if the firms stock price is $11.88, assuming the stock is correvtly priced using tbe dividend discount model, what is the required rate if return?

Answer 1

The required rate of return in this case can be found using the Dividend Discount Model (DDM) and is approximately 10.5%.

Step-by-step explanation:

The required rate of return in this case can be found using the Dividend Discount Model (DDM). The DDM states that the stock price is equal to the present value of all future dividends. In this case, the company issues a $1.25 per share dividend every year. So, the dividend can be considered a perpetuity.

The required rate of return for the firm's stock priced at $11.88, with a dividend of $1.25 per share, can be calculated using the Dividend Discount Model (DDM). To find it, we use the formula for DDM without growth, which is Dividend per Share divided by Stock Price equals Required Rate of Return. Substituting the values, we get $1.25 ÷ $11.88, resulting in an estimated required rate of return of approximately 10.52%.