The Lory Company had net earnings of €127,000 this past year.Dividends were paid of €38,100 on the company's equity of €1,587,500.If Lory has 100,000 shares outstanding with a current market price of €11.625 per share, what is the required rate of return?

Question

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First, we need to calculate the dividend per share:
Dividend per share = Total dividends paid / Number of shares outstanding
Dividend per share = €38,100 / 100,000 = €0.381 per share

Then we can calculate the dividend yield:
Dividend yield = Dividend per share / Market price per share
Dividend yield = €0.381 / €11.625 = 0.0328 or 3.28%

Next, we can calculate the earnings per share (EPS):
EPS = Net earnings / Number of shares outstanding
EPS = €127,000 / 100,000 = €1.27 per share

Using the dividend discount model:
Required rate of return = (Dividend per share / Market price per share) + growth rate
Assuming a sustainable growth rate of 0% (since no information is provided), we can simplify the formula to:
Required rate of return = (Dividend per share / Market price per share) + (EPS / Market price per share)
Required rate of return = (€0.381 / €11.625) + (€1.27 / €11.625) = 0.0328 + 0.1095 = 0.1423 or 14.23%

Therefore, the required rate of return is 14%.

The Lory Company Had Net Earnings of €127,000 This Past