Use the dividend growth model to determine the required rate of return for equity. Your firm anticipates paying a dividend of $2.25 per share next year, 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

Using the dividend growth model, we can solve for the required rate of return:

Required rate of return = (Dividend / Price) + Growth rate of dividends

Required rate of return = ($2.25 / $40.20) + 0.03

Required rate of return = 0.056 + 0.03

Required rate of return = 0.086 or 8.60%

Therefore, the best choice is B.

Use the Dividend Growth Model to Determine the Required Rate