An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth rate is equal to 3%, and the current share price is $40. What is the required rate of return on the stock

r = 10.5%

Explanation:

Using Dividend growth model, we have the following equation:

P = D (1) / r - g

P: Stock price ($40)

D (1) : Year end dividend ($3)

g: Dividend growth rate (3%)

r: required rate of return (Missing value)

By inputting numbers into the equation, we have:

40 = 3 / r - 0.03

--> r = 10.5%