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23 October, 14:36

An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32, assuming a constant growth rate of 4%. What is the required rate of return? Select one:

a. 10.3%

b. 10.1%

c. 8.1%

d. None of these

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  1. 23 October, 14:37
    0
    8.06%

    Explanation:

    Use dividend discount model (DDM) to find the required rate of return;

    r = (D1/P0) + g

    whereby, D1 = Next year's dividend = 2.32

    P0 = Current price of the stock = 57.20

    g = stock dividend's growth rate = 4% or 0.04 as a decimal

    Next, plug in the numbers to the formula;

    r = (2.32/57.20) + 0.04

    r = 0.0406 + 0.04

    r = 0.0806 or 8.06%

    Therefore, the required rate of return is 8.06%
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