Question

"is expected to grow at a constant rate of 5.00 percent. If the company’s next dividend, which will be paid in a year, is $1.68 and its current stock price is $22.35, what is the required rate of return on this stock?

Answer 1

r = 0.12516 or 12.516% rounded off to 12.52%

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 P0, D1 and g in the formula, we can calculate the r to be,

22.35 = 1.68 / (r - 0.05)

22.35 * (r - 0.05) = 1.68

22.35r - 1.1175 = 1.68

22.35r = 1.68 + 1.1175

r = 2.7975 / 22.35

r = 0.12516 or 12.516% rounded off to 12.52%