The No-zip Snap 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 No-Zip has 100,000 shares outstanding with a current market price of $11 5/8 per share, what is the required rate of return?
A) 9%
B) 6%
C) 4.2%
D) 14%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the formula: (Dividends per share / Market price per share) + Growth rate. Dividends per share = $38,100 / 100,000 = $0.381. Market price per share = $11.625. Growth rate = (Net earnings - Dividends) / Equity = ($127,000 - $38,100) / $1,587,500 = 5.6%. Required rate of return = ($0.381 / $11.625) + 5.6% = 9%.

The No-Zip Snap Company Had Net Earnings of $127,000 This