The market value of a company's shares is $25 each, the estimated dividend next year is $0.70, and the estimated long-term growth rate in dividends is 5 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 with growth), 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 = ($0.70 / $25) + 5% = 0.028 + 5% = 7.8%.

The Market Value of a Company's Shares Is $25 Each