McIntyre's Moats, Inc. currently pays no dividends, but the ﬁrm will begin paying dividends in three years. The ﬁrst dividend will be $2.50 and dividends are expected to grow at 2% thereafter. Given a
Current market price of $55.62, what is the required return on the stock?

Question

Quizplus · Accepted Answer

The required return can be calculated using the Gordon Growth Model (Dividend Discount Model) for a stock that will start paying dividends in the future. The formula is: P = D1 / (r - g), where P is the current price, D1 is the dividend in year 1, r is the required return, and g is the growth rate. Here, P = $55.62, D1 = $2.50, and g = 2%. Solving for r gives approximately 6.6%.