Assume that Big Hat is selling at its equilibrium price. Also assume that dividends are expected to grow at a constant rate of 25% for the foreseeable future. What is the required return on the stock?

Question

Quizplus · Accepted Answer

The required return on the stock can be calculated using the Gordon Growth Model (Dividend Discount Model), which states that the required return is the sum of the dividend growth rate and the dividend yield. Since the dividend growth rate is 25%, the required return must be higher than this to account for the dividend yield, making 26.7% the most plausible choice.

Assume That Big Hat Is Selling at Its Equilibrium Price