The current yield on Alpha's common stock is 5.2%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.3 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?

Question

Quizplus · Accepted Answer

The required rate of return is the current yield plus the expected dividend growth rate. The current yield is 5.2%, and the expected dividend growth rate is (2.3 - 2.1) / 2.1 = 9.52%. Therefore, the required rate of return is 5.2% + 9.52% = 14.72%.

The Current Yield on Alpha's Common Stock Is 5