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23 April, 12:59

Dividends are equal to $5, and the current share price is $50. Dividends are expected to grow at 2% forever. According to the dividend growth model, what is the investor's required rate of return?

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  1. 23 April, 13:22
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    Required rate of return = 12.2%

    Explanation:

    According to the dividend growth model the price of a stock is

    D * (1+G) / R-G

    D = dividend

    G=growth

    R = Required rate of return

    In order to find the required rate of return we will put the values given to us in the question into the formula.

    D=5

    G=2%

    Price = $50

    50=5 * (1+0.02) / R-0.02

    50R-1=5.1

    50R=5.1+1

    50R=6.1

    R=6.1/50

    R=0.122=12.2%
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