Question

General Gabardine Inc. last year paid a dividend of $3.38 per share of common stock. The dividends are anticipated to maintain an annual growth rate of 4.82% forever. If the stock currently sells for $46.72, what is the required return ?

Answer 1

As per Constant Dividen Model'

Intrinisc Value of Share = D1 /( Re -g)

Were: D1 Stands for Next Dividend = 3.38 + 4.82% of 3.38, ie last year dividend plus the growth rate

Re stands for Required rate of return which we have to determine

g stands for growth rate

Intrinsic Value (IV) = 46.72 = [3.38+(3.38 x 4.82%)] / Re -0.0482

46.72 = 3.543 /(Re -0.0482)

46.72Re -2.252 =3.543

Re = 12.404%

There fore the Required return = 12.404%

Answers are rounded of to decimals