To calculate the required rate of return on the stock, use the dividend growth model. The required rate of return is 5%. C .15.2 percent
The formula for the required rate of return is:
Rate of Return = Dividend / Stock Price + Dividend Growth Rate
In this case, the dividend is $2 per share, the stock price is $40 per share, and the earnings per share is $4.
First, we calculate the dividend growth rate:
Growth Rate = Earnings per Share / Book Value per Share
Growth Rate = 4 / 25 = 0.16 or 16%
Next, we plug in the values into the rate of return formula:
Rate of Return = 2 / 40 + 0.16 = 0.05 or 5%
Therefore, the required rate of return on the stock is 5%.
question:
River Co. Just paid a dividend of $2 per share out of earnings of $4 per share. If its book value per share is $25 and its stock is currently selling for $40 per share, calculate the required rate of return on the stock
Multiple Choice
12 percent
147 percent
15.2 percent
13.4 percentTo calculate the required rate of return on the stock, use the dividend growth model. The required rate of return is 5%. C .15.2 percent