Question

The next dividend payment by Company A, will be $1.92 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $38 per share, what is the required return?

Answer 1

Answer: 11.05 %

Explanation: Required return can be defined as the measure of profitability of business in relation to its different types of securities such as equity, preference and debt.

In this problem we can compute return on equity by using following formula :-

`cost\:of\:equity\:=\:(expected\:dividend)/(current\:price)+growth`

`cost\:of\:equity\:=\:(1.92)/(38)+0.06`

11.05%