Use the dividend growth model to determine the required rate of return for equity.Your firm intends to issue new common stock.Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.50 in one year.If you anticipate a constant growth in dividends of 4.00% per year and the investment banking firm will take 10.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?
A)6.78%
B)7.08%
C)7.19%
D)10.20%

Question

Quizplus · Accepted Answer

The required rate of return for equity is 6.78%. This is calculated using the dividend growth model, which states that the required rate of return is equal to the dividend yield plus the growth rate of dividends. In this case, the dividend yield is $0.50/$20.00 = 2.50%, and the growth rate of dividends is 4.00%. Therefore, the required rate of return is 2.50% + 4.00% = 6.78%.

Use the Dividend Growth Model to Determine the Required Rate