Question

The next dividend payment by Skippy, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent, forever. The stock currently sells for $29 per share. What is the required return

Answer 1

ke = D1/Po + g

Ke = $1.56/29 + 0.04

ke = 0.0938 = 9.38%

Explanation: Cost of equity is equal to expected dividend divided by the market price plus growth rate. Ke represents required return or cost of equity, Po denotes the current market price and g is the growth rate.