DT Industries stock is valued at $10.40 a share.The firm pays annual dividends at an increasing rate of 2.5 percent annually.Next year's dividend will be $1.05 per share.What is the required return on this stock?
A)10.00 percent
B)11.50 percent
C)12.60 percent
D)13.50 percent
E)14.80 percent

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the required return:

Dividend next year = $1.05
Growth rate = 2.5%
Current stock price = $10.40

Required return = (Dividend next year / Current stock price) + Growth rate
Required return = ($1.05 / $10.40) + 0.025
Required return = 0.101 + 0.025
Required return = 0.1260 or 12.60%

Therefore, the required return on this stock is 12.60%. Option C is the correct answer.

DT Industries Stock Is Valued at $10