Home Depot (HD) recently paid a $0.90 dividend. The dividend is expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the return shareholders are expecting?

Question

Quizplus · Accepted Answer

The expected return for shareholders can be calculated using the dividend discount model (DDM), which in its simplest form is $ P_0 = \frac{D_1}{r - g} $, where $P_0$ is the current stock price, $D_1$ is the dividend next year, $r$ is the required rate of return (or the expected return), and $g$ is the growth rate of the dividend. Given that the dividend is expected to grow at a 17 percent rate, the dividend next year ($D_1$) would be $0.90 * (1 + 0.17) = $1.053. Plugging the values into the formula and solving for $r$ gives us the expected return, which is approximately 20.18 percent.

Home Depot (HD) Recently Paid a $0