Question

The next dividend payment by Savitz, Inc., will be $1.72 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $33 per share, what is the required return

Answer 1

9.21%

Step-by-step explanation:

To calculate this, we use the formula for the dividend discount model as follows:

P = D/(r - g) ............................ (1)

Where,

P = current stock price = $33

D = Next dividend = $1.72

r = required return = ?

g = growth rate = 4% = 0.04

Substituting the values into equation (1) and solve for r, we have:

33 = 1.72/(r - 0.04)

33(r - 0.04) = 1.72

33r - 1.32 = 1.72

33r = 1.72 + 1.32

33r = 3.04

r = 3.04/33

r = 0.0921, or 9.21%