Home Renu Inc.'s most recent dividend was $0.25. The company plans to double it's dividend every year for the next four years, then increase it at a constant rate of 5% per year. To estimate the intrinsic value of this stock using the dividend-growth model, the required rate of return must be

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The dividend-growth model can be used to estimate the intrinsic value of a stock by discounting the future dividends back to their present value. For this model to be applicable, the required rate of return must be greater than the growth rate of dividends. Since the dividends are initially growing at a doubling rate (which is significantly higher than 5%) and then stabilize at a 5% growth rate, the required rate of return must be greater than the long-term growth rate of 5% to ensure the present value of future dividends converges to a finite number.