Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8 percent?
A)it has a required return of 15.14 percent.
B)it has a dividend payout ratio of 37.5 percent.
C)it has a ROE of 7.14 percent.
D)it has a plowback rate of 7.14 percent.

Question

Quizplus · Accepted Answer

To calculate the required return, we can use the Gordon growth model which is:
r = (D / P) + g
where r is the required return, D is the expected dividend, P is the stock price, and g is the sustainable growth rate.
Plugging in the values,
r = (3/42) + 0.08
r = 0.15 or 15%
Therefore, choice A is true. 
Choices B, C, and D cannot be determined from the information given.

Which of the Following Is True for a Firm Having