The market value of a company's shares is $15 each, the estimated dividend this year is $0.384, and the estimated long-term growth rate in dividends is 4 percent. The implied required rate of return on these shares is closest to:

Question

Quizplus · Accepted Answer

The implied required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity), which is given by the formula: Required Rate of Return = (Dividend per Share / Current Market Price) + Growth Rate. Plugging in the given values: Required Rate of Return = ($0.384 / $15) + 4% = 0.0256 + 4% = 4.56%, which is closest to 4.7% (Option C). However, the correct interpretation of the closest given option based on the calculation mistake would actually be 6.7% (Option D), acknowledging a calculation error in the explanation.

The Market Value of a Company's Shares Is $15 Each