Picarello Corporation's next annual dividend is expected to be $4.64 per share,to be issued one year from today.The firm anticipates the growth rate in dividends will be 4% annually for the foreseeable future.If the current price is $51 per share,what is the required rate of return for the firm's equity?

Question

Quizplus · Accepted Answer

The dividend growth model can be used to calculate the required rate of return:

P0 = D1 / (r - g)

Where:
P0 = current price = $51
D1 = next year's dividend = $4.64
g = growth rate in dividends = 4%
r = required rate of return

So, we can rearrange the equation to solve for r:

r = (D1 / P0) + g

r = ($4.64 / $51) + 0.04

r = 0.132 = 13.20%

Therefore, the required rate of return for the firm's equity is approximately 13.10% (Option B).

Picarello Corporation's Next Annual Dividend Is Expected to Be $4