Question

Caccamise Company is expected to maintain a constant 5.35 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 3.85 percent, what is the required return on the company's stock? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

Answer 1

The required return on Caccamise Company's stock is calculated by adding the dividend yield of 3.85% to the constant growth rate of dividends at 5.35%, resulting in a required return of 9.20%.

Step-by-step explanation:

The required rate of return on the company's stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model), which relates the dividend per share, growth rate of dividends, and the required rate of return. Since the Caccamise Company is expected to maintain a constant growth rate in its dividends indefinitely, we can use this model to find the required return by adding the dividend yield to the growth rate of dividends.

The formula for the required rate of return (r) is given by:

r = Dividend Yield + Growth Rate

In this case:

r = 3.85% + 5.35%

r = 9.20%

Thus, the required return on the company's stock is 9.20% percent.