Question

Brewery Inc is expected to maintain a constant 5.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 4.7 percent, what is the required rate of return on the company's stock?

Answer 1

To calculate the required rate of return on Brewery Inc's stock, you would add the dividend yield (4.7%) to the constant dividend growth rate (5.8%), resulting in a required rate of return of 10.5%.

Step-by-step explanation:

The student is asking how to calculate the required rate of return on Brewery Inc's stock, given the constant growth rate of the dividends and the dividend yield. The required rate of return is calculated using the Gordon Growth Model (also known as the Dividend Discount Model). According to this model, the required rate of return (r) is the dividend yield (D/P) plus the growth rate (g). In the case of Brewery Inc, the dividend yield is 4.7% and the growth rate is 5.8%. Therefore, the required rate of return on the company's stock is:

r = D/P + g
r = 4.7% + 5.8%
r = 10.5%

This required rate of return reflects the compensation that the investors require for the risk they undertake by investing in Brewery Inc's stock.