Question

The market price of a stock is $35.43 and it is expected to pay

a $2.92 dividend next year. The dividend is expected to grow at
4.63% forever. What is the required rate of return for the
stock?

Answer 1

The required rate of return for the stock, calculated using the Gordon Growth Model, is 12.87%.

Step-by-step explanation:

The student is asking how to calculate the required rate of return for a stock given its current price, expected dividend, and expected dividend growth rate. This can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model) which posits that the value of a stock is the present value of all future dividends it is expected to provide over an indefinite period. Assuming a constant growth rate for dividends, the formula to find the required rate of return is:

Required Rate of Return = (Dividend Payment / Stock Price) + Growth Rate of Dividends

In this case, the calculation would be:

Required Rate of Return = ($2.92 / $35.43) + 4.63%

Thus, the calculation would be:

Required Rate of Return = 0.0824 + 0.0463 (8.24% + 4.63%)

Required Rate of Return = 12.87%