DT Industries stock is valued at $9.60 a share. The firm pays annual dividends at an increasing rate of 2 percent annually. Next year's dividend will be $1.50 per share. What is the required return on this stock?

Question

Quizplus · Accepted Answer

We can use the Gordon growth model to solve the problem:

P0 = D1 / (r - g)

where P0 is the current stock price, D1 is the next year's dividend, r is the required return, and g is the annual growth rate of dividends.

Plugging in the given values:

$9.60 = $1.50 / (r - 0.02)

Solving for r:

r = ($1.50 / $9.60) + 0.02 = 0.1563 = 15.63%

Therefore, the required return on this stock is 15.63%, which is closest to option C (17.63%).

DT Industries Stock Is Valued at $9