The current yield on Alpha's ordinary equity is 4.8%.The company just paid a €2.10 dividend.The rumor is that the dividend will be €2.205 next year.The dividend growth rate is expected to remain constant at the current.What is the required rate of return on Alpha's equity?
A)10.04%
B)16.07%
C)21.88%
D)43.75%
E)45.94%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model: Required return = (Dividend next year / Current 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, the required return is 4.8% + 5% = 9.8%, which is closest to 10.04%.

The Current Yield on Alpha's Ordinary Equity Is 4