Question

MCMC just paid a dividend of $4.10 and is expected to increase the future dividends at a rate of 4% per year indefinitely. If the current share price is $40, what is the return required by shareholders?

a.) 12.65%
b.) 13.52%
c.) 13.99%
d.) 14.66%
e.) None of the above

Answer 1

d.) 14.66%

Step-by-step explanation:

The computation of the return required by shareholders is shown below:

Current share price = Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend would be

= $4.10 + $4.10 × 0.04

= $4.10 + 0.164

= $4.264

So, the return required by shareholders

$40 = $4.264 ÷ (Required rate of return - 4%)

After solving this equation,

The required rate of return is 14.66%