The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The speculation is that the dividend will be $2.205 next year. The dividend growth rate is expected to
Remain constant at the current level. What is the required rate of return on Alpha's stock?

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model: Required Rate of Return = (Dividend Next Year / Current Stock Price) + Growth Rate. The growth rate is (2.205 - 2.10) / 2.10 = 5%. The current yield is 4.8%, which implies the dividend yield. Therefore, Required Rate of Return = 4.8% + 5% = 9.8%, which is closest to 10.04%.

The Current Yield on Alpha's Common Stock Is 4