Final answer:
To calculate the required rate of return for a stock with a current dividend of $5.98, an expected growth rate of 3.92%, and a market price of $55.48, the Gordon growth model is applied, which combines the expected dividend growth and the current market price to determine the expected annual percentage return from the stock.
Step-by-step explanation:
The student has asked how to calculate the required rate of return for a stock. To find this, the Gordon growth model (also known as the Dividend Discount Model) can be used, which assumes that a company's dividends will continue to grow at a consistent rate indefinitely. The model's formula is:
Required rate of return (R) = (Next year's dividend / Current market price) + Growth rate
Given the stock's current dividend of $5.98 and its expected growth rate of 3.92%, and a current market price of $55.48, the calculation is as follows:
R = ($5.98 * (1 + 0.0392) / $55.48) + 0.0392
Rounded to a percentage, this gives us the required rate of return for the stock. The answer will reflect the expected annual percentage return taking into account both the dividend income and the capital gains.