Question

The next dividend payment by Im, Incorporated, will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $29 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

To calculate the required return for Im, Incorporated, which has a dividend of $1.56, a growth rate of 4%, and a stock price of $29, we use the Gordon Growth Model formula: r = (D1 / P0) + g. The calculated required return is 9.38%.

Step-by-step explanation:

The student's question involves calculating the required return on a stock given its dividend payment, growth rate, and current price. To find the required return, one can use the Gordon Growth Model (also known as the Dividend Discount Model), which is given by the formula:

r = (D1 / P0) + g

Where:

• r is the required return,
• D1 is the dividend payment for the next period (in this case, $1.56),
• P0 is the current stock price (in this case, $29), and
• g is the growth rate of the dividends (in this case, 4%).

Substituting the given values into the formula provides:

r = ($1.56 / $29) + 0.04

r = 0.0538 + 0.04

r = 0.0938 or 9.38%

Therefore, the required return for Im, Incorporated stock is 9.38%.