Question

The next dividend payment by Skippy, Inc., will be $2.95 per share. The dividends are anticipated to maintain a growth rate of 4.8%, forever. If the stock currently sells for $53.10 per share, what is the required return?

Answer 1

r = 0.103555 or 10.3555% rounded off to 10.36%

Step-by-step explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

• D1 is dividend expected for the next period /year

• g is the growth rate

• r is the required rate of return or cost of equity

Plugging in the values for D0, P0 and g in the formula, we can calculate r to be,

53.1 = 2.95 / (r - 0.048)

53.1 * (r - 0.048) = 2.95

53.1r - 2.5488 = 2.95

53.1r = 2.95+ 2.5488

r = 5.4988 / 53.1

r = 0.103555 or 10.3555% rounded off to 10.36%