The next dividend payment by Halestorm, Inc., will be $1.48 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $27 per share, what is the required return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

The required rate of return is 10.48%.

Explanation:

The DDM has several models that are used to calculate the stock price. Out of these model, one is the constant growth model that is applied when the dividend paid by a company is expected to grow at a consatnt percentage indefinitely.

The formula for price under this model is:

P0 or price today = D1 / r - g

Plugging in the available value,

27 = 1.48 / (r - 0.05)

27 * (r - 0.05) = 1.48

27r - 1.35 = 1.48

27r = 1.48 + 1.35

r = 2.83 / 27

r = 0.1048 or 10.48%

The required return is 10.48%

Explanation:

Given D1 = $1.45, SP=$27 g = 5% r = ?

The DDM model will be used to calculate the required return

SP = D1/r-g

Deriving the formula to solve for r we get

r = D1/S + g

=1.48/27 + 0.05

=0.1048/10.48%