Jand, Inc., currently pays a dividend of $1.32, which is expected to grow indefinitely at 4%. If the current value of Jand's shares based on the constant-growth dividend discount model is $33.16, what is the required rate of return?

Question

Roberto Vaughn

Business

9 June, 01:02

Jand, Inc., currently pays a dividend of $1.32, which is expected to grow indefinitely at 4%. If the current value of Jand's shares based on the constant-growth dividend discount model is $33.16, what is the required rate of return?

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Answers (1)

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Buckley · Answer 1

What is the required rate of return?

8%

Explanation:

The dividend discount model state that the price of a stock should be the result of the Present Value of all of its future dividends, the Gordon growth model indicates that:

Price per Share = D / (r - g) Where:

D = the estimated value of next year's dividend

r = The required rate of return

g = the constant growth rate

Expressed in values is:

Share = D / (r - g) = => $33,16 = $1,32 / (r-0,04)

$33,16 (r-0,04) = $1,32

r-0,04 = 1,32/33,16

r-0,04 = 0,0398

r = 0,0398 + 0,04 = 0,0798

r = 8%