Thomas Furniture is expected to pay a dividend of $1.75 next year. If the expected long-run constant growth rate for this stock is 5 percent, and if the current market price is $43.75, what rate of return do investors require for the stock?

Question

Quizplus · Accepted Answer

The required rate of return for a stock 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 Payment Next Year / Current Market Price) + Growth Rate. Plugging in the given values: Required Rate of Return = ($1.75 / $43.75) + 0.05 = 0.04 + 0.05 = 0.09, or 9%.

Thomas Furniture Is Expected to Pay a Dividend of $1