Question

Jand, Inc., currently pays a dividend of $1.24, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is $30.16, what is the required rate of return?

Answer 1

9.32%

Step-by-step explanation:

The formula to compute the required rate of return is shown below:

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

where,

Market price per share is $30.16

Next year dividend is

= $1.24 + $1.24 × 5%

= $1.24 + 0.062

= $1.302

And, the growth rate is 5%

So, the required rate of return is

$30.16 = ($1.302) ÷ (Required rate of return - 5%)

Let us assume the required rate of return be X

So,

$30.16X - $1.508 = $1.302

After solving this, the required rate of return is 9.32%