The current price of XYZ stock is $51. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the required rate of return on XYZ stock?

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Required Rate of Return = (D1 / P0) + g, where D1 is the dividend expected next year, P0 is the current price of the stock, and g is the growth rate of the dividend. The most recent dividend was $1, and it's expected to grow at 7% indefinitely, so D1 = $1 * (1 + 0.07) = $1.07. Plugging the values into the formula gives: Required Rate of Return = ($1.07 / $51) + 0.07 = 0.0209 + 0.07 = 0.0909 or 9.1%.

The Current Price of XYZ Stock Is $51