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14 March, 07:02

A stock just paid a dividend of $4.17 and is expected to maintain a constant dividend growth rate of 4.5 percent indefinitely. If the current stock price is $70, what is the required return on the stock?

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Answers (2)
  1. 14 March, 07:10
    0
    The required return on the stock is 10.73%

    Explanation:

    The required return can deduced from the stock price formula given below:

    Price=Do * (1+g) / r-g

    Price is $70

    Do is the dividend just paid is $4.17

    g is the growth rate of dividend at 4.5%

    r is the required return which is the unknown

    $70=$4.17 * (1+0.045) / r-0.045

    $70=$4.17 * (1.045) / r-0.045

    by cross-multiplication the equation becomes

    $70 * (r-0.045) = $4.17*1.045

    r-0.045=$4.17*1.045/70

    r = ($4.17*1.045/70) + 0.045

    r=10.73%

    The required return on this investment is 10.73%
  2. 14 March, 07:13
    0
    Dividend = 4.17$

    growth rate = 4.5%

    Current stock price = 70$

    Required return = ?

    required return = dividend next year / current stock price + growth rate

    Required Return = 4.17 / 70+4.5%

    = 1.323%
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