Question

Bavarian sausage is expected to pay a $2.00 dividend next year. if the constant growth rate is 3% and the stock currently sells for $35.62, what is the required rate of return on this stock?

Answer 1

Stock price=(Dividend for the next period)/(Required rate of return-Growth rate)
Given that:
Dividend for the next period=$2
Growth rate=3%
Price of stock=$35.62
Required rate of return=?
Now, $35.62=$2/(Required rate of return-3%)
=>$35.62/$2=1/(Required rate of return-3%)
=>17.81=1/(Required rate of return-3%)
=>1/17.81=(Required rate of return-3%)
=>1/17.81+3%=Required rate of return
=>0.086148231=Required rate of return
=>Required rate of return=8.61% (Rounded to two decimal places)