Question

Great Lakes Health Care just paid a $3.18 annual dividend. In addition Great Lakes plans to pay $3.75 next year. The current dividend yield on Great Lakes common stock is 5.92 percent. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

Group of answer choices

7.25 percent

7.82 percent

8.08 percent

8.39 percent

8.75 percent

Answer 1

Given about Great Lakes Health Care,

Last dividend paid D0 = $3.18

Expected next year Dividend D1 = $3.75

current dividend yield, DY = 5.92%

So, Capital gains yield CGY = growth rate = (D1 - D0)/D0 = (3.75 - 3.18)/3.18 = 17.92%

So, required rate of return = Dividend yield + Capital gains yield = 5.92 + 17.92 = 23.84%

There is definitely some misprinting in values of dividend, because of growth rate of 17.92% is abnormal constant dividend growth rate. Please check values once again.

Answer is correct based on given data.