Question

Tell Me Why Co. is expected to maintain a constant 6.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.2 percent, what is the required return on the company’s stock?

Answer #1

Required return on company's stock is the sum of dividend yield and dividend growth rate. | ||||||||||

Required return on the company's stock | = | Dividend growth rate + Dividend Yield | ||||||||

= | 6.4% + 8.2% | |||||||||

= | 14.60% |
|||||||||

Alternatively: | ||||||||||

Suppose current Price of share is $ 100 | ||||||||||

Next Year dividend | = | Current Price*Dividend Yield | ||||||||

= | 100*8.2% | |||||||||

= | $ 8.20 | |||||||||

Required Return on stock | = | (D1/P0)+g | Where, | |||||||

= | (8.20/100)+0.064 | D1 | $ 8.20 | |||||||

= | 14.60% |
P0 | $ 100.00 | |||||||

g | 6.40% | |||||||||

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