Question

A stock just paid a dividend of $4.49 and is expected to maintain a constant dividend growth rate of 4.1 percent indefinitely. If the current stock price is $78, what is the required return on the stock

Answer 1

The required rate of return is 10.09%

Step-by-step explanation:

The computation of the required return is shown below:

As we know that

Price of the stock = Dividend ÷ (required rate of return - growth rate)

$78 = $4.49 × (1 + 4.1%) ÷ (required rate of return - 4.1%)

$78 = $4.67 ÷ (required rate of return - 4.1%)

After solving this, the required rate of return is 10.09%

We simply applied the above formula so that the correct value could come

And, the same is to be considered