Final answer:
To calculate the required rate of return, the Gordon Growth Model is used. The model resulted in a required rate of return of 14.04% for the stock with a current market price of $57.92 and a dividend growth rate of 4.63%.
Step-by-step explanation:
The student has asked about determining the required rate of return for a stock with a known market price and a dividend that grows at a constant rate indefinitely. To find the required rate of return on this stock, we can use the Gordon Growth Model (a variant of the Dividend Discount Model), which is given by the formula:
R = (D1 / P0) + g
Where R is the required rate of return, D1 is the dividend expected one year from now, P0 is the current market price of the stock, and g is the growth rate of the dividends. Since the dividend just paid is $5.21 and is expected to grow at 4.63% forever, we first calculate D1 as $5.21 multiplied by (1 + 4.63%).
D1 = $5.21 * (1 + 0.0463) = $5.45 approximately
Next, we plug in the values into the Gordon Growth Model to get the required rate of return:
R = ($5.45 / $57.92) + 0.0463
R = 0.0941 + 0.0463
R = 0.1404 or 14.04%
The required rate of return for the stock is therefore 14.04%.