Final answer:
To calculate the required rate of return for a stock given its market price, expected dividend, and dividend growth rate, use the Gordon Growth Model. With a market price of $27.18, expected dividend of $2.58, and dividend growth of 2.47%, the required rate of return is the sum of the yield (dividend/market price) plus the growth rate.
Step-by-step explanation:
The rate of return on a financial investment in a share of stock encompasses both dividends and capital gains. To calculate the required rate of return for a stock when you know its market price, its expected dividend, and the dividend's growth rate, you would use the Gordon Growth Model (also known as the Dividend Discount Model). This model takes the expected dividend payment and divides it by the difference between the required rate of return and the dividend growth rate.
For your specific question: Given a stock with a market price of $27.18, an expected dividend of $2.58, and dividend growth of 2.47%, you can set up the equation as follows:
Required Rate of Return = (Dividend Next Year / Market Price) + Dividend Growth Rate
Plugging in the values:
Required Rate of Return = ($2.58 / $27.18) + 0.0247
After calculating the above, you will get the required rate of return for this particular stock.