Question

The market price of a stock is $42.62 and it is expected to pay a $3.01 dividend next year. The dividend is expected to grow at 3.26% forever. What is the required rate of return for the stock?

Answer format: Percentage Round to: 0 decimal places (Example: 9%, % sign required. Will accept decimal format rounded to 2 decimal places (ex: 0.09))

Answer 1

Current market price of a stock: $42.62

Expected dividend: $3.01

Dividend growth rate: 3.26%.

We knoe that as per dividend growth model (Gorden's Model):

Current price of stock: Expected Dividend / ( Required rate of return - Expected growth rate)

Hence,

Required rate of return : (Expected Dividend/Current price of stock) + Expected growth rate

Required rate of return : ($ 3.01 / $42.62) + 0.0326

Required rate of return : 0.0706 + 0.0326

Required rate of return : 0.1032 or 10.32%