Use the dividend growth model to determine the required rate of return for equity.Your firm intends to pay a dividend of $2.25 per share one year from now,has a recent price of $40.20 per share,and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future.
A)8.76%
B)8.60%
C)8.44%
D)There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

The required rate of return for equity can be calculated using the dividend growth model as follows:

Required rate of return = (Dividend payment / Stock price) + Growth rate

Here, the dividend payment is $2.25, the stock price is $40.20, and the growth rate is 3.00%.

Required rate of return = ($2.25 / $40.20) + 0.03 = 0.056 + 0.03 = 0.086 (or 8.60%)

Therefore, the best choice is (B) 8.60%

Use the Dividend Growth Model to Determine the Required Rate