Final answer:
The question involves calculating the required return for Halestorm, Inc.'s stock using the Gordon Growth Model. By inputting the expected dividend, stock price, and dividend growth rate into the model's formula, the required rate of return is derived, which reflects both the dividend payment and the expected growth of these payments.
Step-by-step explanation:
The student's question is about calculating the required return on a stock based on its current price, the anticipated dividend payment, and its constant growth rate. This scenario is an application of the Gordon Growth Model (also known as the Dividend Discount Model), which is a method used in financial analysis to determine the present value of a stock based on its future series of dividends that grow at a constant rate.
To calculate the required return for Halestorm, Inc., we can use the formula of the Gordon Growth Model, which is:
R = (D1 / P0) + g
Where R is the required rate of return, D1 is the expected dividend next period, P0 is the current stock price, and g is the growth rate of the dividends. By substituting the given values (D1 = $2.04, P0 = $37, g = 4.5%), the required return for the stock can be calculated.
So, the calculation would be as follows:
R = ($2.04 / $37) + 0.045
After performing the calculation, it will provide us with the percentage that represents the investor's expected rate of return considering both the dividend and the dividend growth rate.
When firms like Halestorm, Inc. decide to issue stock, investors anticipate a rate of return coming from two sources: dividends and potential capital gains. The anticipated growth rate of the dividends plays a crucial role in determining what an investor is willing to pay for the stock today.