Question

Martin's Mills common stock is currently selling for $70.00 per share. The company just paid a $1.80 dividend and plans to pay $1.82 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock

Answer 1

The required rate of return is 3.71%

Step-by-step explanation:

we are given the stock price of $70.00 per share then we also given the dividends for this year for $1.80 and its expected to be $1.82 net year so we ill be using this formula to calculate the required rate of return:

Required rate of Return = (expected dividend payment/current stock price) + dividend growth rate

so firstly we will get the dividend growth rate which is calculated as follows,

(expected dividend - current dividend)/current dividend

($1.82-$1.80)/$1.80

then we are given the current stock price therefore we will substitute on the above mentioned formula

Required rate of return = ($1.82/$70.00) + ($0.02/$1.80)

=0.037111111111111 then we multiply by 100

=3.71% correct to two decimal paces.