Question

Tell Me Why Co. is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.8 percent, what is the required return on the company's stock?

A) 9.8%
B) 10.8%
C) 11.8%
D) 12.8%

Answer 1

The required return on Tell Me Why Co.'s stock is calculated using the dividend yield of 5.8 percent and the growth rate of 4 percent, leading to a required return of 9.8%. The correct answer is A) 9.8%.

Step-by-step explanation:

The student's question pertains to calculating the required return on stock using the dividend growth model. In this scenario, Tell Me Why Co. is expected to maintain a constant 4 percent growth rate in its dividends indefinitely, and it has a dividend yield of 5.8 percent. To determine the required return, we use the formula: required return = dividend yield + dividend growth rate. Therefore, the required return on the company's stock would be the sum of the dividend yield and the growth rate, which in this case is 5.8 percent + 4 percent.

Required return = 5.8% (dividend yield) + 4% (growth rate) = 9.8%.

The correct answer to the student's question would be A) 9.8%.