Question

Beaver Corporation stock is currently selling for​ $58.00. It is expected to pay a dividend of​ $5.00 at the end of the year. Dividends are expected to grow at a constant rate of​ 7.5% indefinitely. Compute the required rate of return on Beaver Corporation stock.

Answer 1

Rate of return = 16.77%

Step-by-step explanation:

given data

currently stock price P = $58.00

expected dividend D =​ $5.00

growth rate G = 7.5% = 0.075

to find out

rate of return

solution

we will apply here dividend formula that is

D1 = D (1+G) ..............1

here D is expected dividend and G is growth rate

so here

D1 = 5 (1+ 0.075)

D1 = 5.375

so here required rate of return on Beaver Corporation stock is

rate of return =
`(D1)/(P)` + G ................2

here P is currently stock price

so

rate of return =
`(5.375)/(58)` + 0.075

rate of return = 0.1677

so

Rate of return = 16.77%