The current price of XYZ stock is $51. Dividends are expected to grow at 7% indeﬁnitely and the most recent dividend was $1. What is the required rate of return on XYZ stock?

Question

Quizplus · Accepted Answer

Using the Gordon Growth model, the required rate of return can be calculated as follows:

$1.07 / ($51 - $1.07) = 0.0214 or 2.14%

Adding the growth rate (7%) to the required rate of return (2.14%) yields 9.14%, which is closest to option B: 9.1%.

The Current Price of XYZ Stock Is $51