The Lory Company had net earnings of $127,000 this past year. Dividends of $38,100 were paid. The company's equity was $1,587,500. If Lory has 100,000 shares outstanding with a current market price of $11.625 per share,and the growth rate is 5.6%,what is the required rate of return?

Question

Quizplus · Accepted Answer

To calculate the required rate of return, we need to use the dividend discount model:

R = (D1 / P0) + g

Where: 
D1 = Dividend per share next year 
P0 = Current market price per share 
g = Growth rate

First, we need to calculate the value of D1:

D1 = Dividends paid / Number of shares outstanding 
D1 = $38,100 / 100,000 
D1 = $0.381 per share

Now we can plug in the values:

R = ($0.381 / $11.625) + 0.056 
R = 0.0328 + 0.056 
R = 0.0888 or 8.88%

Therefore, the required rate of return is 9%, which is closest to option C (9%).

The Lory Company Had Net Earnings of $127,000 This Past