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The current dividend yield on Chrysler’s common stock is 2.8 percent. The company just paid a...

The current dividend yield on Chrysler’s common stock is 2.8 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

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Answer #1

Grwoth Rate = D1 - D0 / D0

= 1.54 - 1.48 / 1.48

= 4.05%

Current yield = Current Divided / Current Price

0.028 = 1.48 / Current Price

Current Price = 52.86

Value of Stock =

52.86 = 1.54 / Rate of Return - 0.0405

52.86 * Rate of Return - 52.86 * 0.0405 = 1.54

Rate of Return = 1.54 + 2.14083 / 52.86

Rate of Return = 6.96%

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