The Lory Company had net earnings of $127,000 this past year.Dividends of $38,100 were paid on the company's equity of $1,587,500.If Lory has 100,000 shares outstanding with a current market price of $11.625 per share,and the growth rate was 5.6% what is the required rate of return?

Question

Quizplus · Accepted Answer

We can use the dividend discount model to solve for the required rate of return.
Dividend per share = Dividends / Number of shares = $38,100 / 100,000 = $0.381
Using the formula: 
Current market price = Dividend per share / (Required rate of return - Growth rate)
$11.625 = $0.381 / (r - 5.6%)
Solving for r, we get:
r = 9.0% rounded to one decimal place.
Therefore, the required rate of return is 9%, which is option C.

The Lory Company Had Net Earnings of $127,000 This Past