The current dividend yield, which is the recent dividend divided by the current stock price, on common stock of Formosan Freedom Co. is 4.8 %. The company just paid a $2.10 dividend. The dividend will be $2.205 in next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on stock of Formosan Freedom Co.?

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model: Required Rate of Return = Dividend Yield + Growth Rate. The growth rate is calculated as ($2.205 - $2.10) / $2.10 = 5%. Therefore, the required rate of return is 4.8% + 5% = 9.8%, which is closest to 10.04%.

The Current Dividend Yield, Which Is the Recent Dividend Divided