Question

The next dividend payment by Grenier, Inc., will be $1.40 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $25 per share, what is the required return

Answer 1

Required Rate of return is 11.6%

Step-by-step explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

As we have the value of the share, we need to calculate the required return rate using following formula.

As the dividend is also given for the next period so we don't need to grow it.

Value of Share = Dividend / (Rate of return - Growth rate)

$25 = $1.40 / ( r - 6% )

r - 0.06 = $1.40 / $25

r - 0.06 = $1.40 / $25

r - 0.06 = 0.056

r = 0.056 + 0.06

r = 0.116

r = 11.6%