Question

The common stock of flo’s home furnishings has a 3.5% dividend yield. You expect the company to grow by 6% annually. What is the required return on this stock?

A) 9.5%
B) 8.5%
C) 10.5%
D) 11.5%

Answer 1

The required return on Flo's Home Furnishings stock, with a 3.5% dividend yield and 6% growth, is calculated as 9.5% using the Gordon Growth Model. This is the sum of the dividend yield and the growth rate.

Step-by-step explanation:

The question asks us to determine the required return on the common stock of Flo's Home Furnishings, given a 3.5% dividend yield and an expected growth rate of 6% annually. To calculate the required return on the stock, we use the Gordon Growth Model which assumes that a company will continue to grow at a constant rate forever. According to this model, the required return (r) is calculated by adding the dividend yield (D/P) to the growth rate (g).

So the required return (r) is:

r = D/P + g

Where D/P is the dividend yield and g is the growth rate:

r = 3.5% + 6%

r = 9.5%

Therefore, the correct answer is A) 9.5%.