What is the required rate of return on a common stock that is expected to pay a $0.75 annual dividend next year if dividends are expected to grow at 2 percent annually and the current stock price is $8.59?
A) 8.73%
B) 8.91%
C) 10.73%
D) 11.38%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth), which is given by the formula: Required Rate of Return = (D1 / P0) + g, where D1 is the dividend next year, P0 is the current stock price, and g is the growth rate. Plugging in the values: Required Rate of Return = ($0.75 / $8.59) + 0.02 = 0.0873 or 8.73%. However, due to a calculation mistake in interpreting the options, the correct mathematical result of 8.73% was intended, but the selection of option C (10.73%) was incorrect. The correct choice should have been A (8.73%).

What Is the Required Rate of Return on a Common