Earnings for a corporation are $20, its stock price is $525, and the growth rate of dividends is 5%. What is the required rate of return implied by the Gordon Growth Model?

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Quizplus · Accepted Answer

The Gordon Growth Model formula is: Required Rate of Return = (Dividend/Price) + Growth Rate. Assuming the dividend is equal to earnings, the dividend yield is $20/$525 = 0.0381 or 3.81%. Adding the growth rate of 5%, the required rate of return is 3.81% + 5% = 8.81%, which rounds to 9%.

Earnings for a Corporation Are $20, Its Stock Price Is