Question

ABC Inc. will pay a dividend of $7.50 next year (one year from today). The market...

ABC Inc. will pay a dividend of $7.50 next year (one year from today). The market believes the dividend will grow at a constant rate of 4%, forever. ABC's stock price is currently $58.59. As an investor, your required rate of return for ABC Inc. is _____________%.

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Answer #1

Gordon Growth Model

As per Gordon Growth Model, the price of the stock is calculated as;

P = Price of the stock

D1 = Next year Dividend

r = Required rate of return

g = Growth rate

In the question; P = 58.59

D1 = 7.50

g = 4%

P = 7.5

Therefore

In Percentage

%

Required rate of return = 16.80 %

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