Newton, Inc. just paid an annual dividend of $0.95. Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. What is the required rate of return on this stock implied by the dividend-growth model

The required rate of return is 12.2%

Explanation:

Dividend growth model is used to calculate the price of the stock based on the dividend, its growth and required rate of return.

Formula to calculate the price

Price = Dividend / (Required rate of return - Growth rate)

P = D / (r - g)

P = $11.54

D = $0.95

g = 4%

Now placing the given values in the formula

$11.54 = $0.95 / (r - 4%)

r - 4% = $0.95 / $11.54

r - 4% = 8.2%

r = 8.2% + 4%

r = 12.2%