Question

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual dividend and announced plans to pay $1.37 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?

Answer 1

If the current dividend yield on CJ's common stock is 1.89 percent. The required rate of return on CJ's common stock is 13.27%.

What is the Required Rate of Return?

The formula for the Gordon growth model is:

Required Rate of Return = Dividend / Stock Price + Dividend Growth Rate

Where:

Current dividend yield: 1.89%

Annual dividend just paid: $1.23

Annual dividend next year: $1.37

Dividend growth rate:

Dividend Growth Rate = (Dividend Next Year - Dividend This Year) / Dividend This Year

Dividend Growth Rate = ($1.37 - $1.23) / $1.23

Dividend Growth Rate= $0.14 / $1.23

Dividend Growth Rate =0.1138

Dividend Growth Rate =11.38%

Required rate of return:

Required Rate of Return = 0.0189 + 0.1138

Required Rate of Return ≈ 0.1327

Required Rate of Return13.27%

Therefore, the required rate of return on CJ's common stock is approximately 13.27%.

Answer 2

The required rate of return on this stock is 13.27%

Step-by-step explanation:

The computation is shown below:

First, we have to determine the dividend growth and then the growth rate. Afterward, the final answer will come

Dividend growth rate = Next year dividend - current year dividend

= $1.37 - $1.23

= $0.14

Now the growth rate would be equal to

= (Dividend growth) ÷ (current year dividend)

= ($0.14) ÷ ($1.23)

= 11.38%

Now add the dividend yield to the growth rate

So, the required rate of return would be

= 11.38% + 1.89%

= 13.27%