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 $45.00 per share and that you should anticipate paying a dividend of $1.50 in one year.If you anticipate a constant growth in dividends of 3.50% per year and the investment banking firm will take 7.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?
A)7.19%
B)6.83%
C)7.08%
D)There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the dividend growth model: $ r = \frac{D_1}{P_0(1-F)} + g $, where $ D_1 = 1.50 $, $ P_0 = 45.00 $, $ F = 0.07 $, and $ g = 0.035 $. Plugging in the values, $ r = \frac{1.50}{45.00(1-0.07)} + 0.035 = 0.0708 $ or 7.08%.

Use the Dividend Growth Model to Determine the Required Rate