Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is the required rate of return on Tangshan's stock?
A) 7.3%
B) 8.4%
C) 9.5%
D) 10.6%

Question

Quizplus · Accepted Answer

The required rate of return (k) can be calculated using the Gordon growth model:

k = (Dividend yield) + (Dividend growth rate)

Dividend yield = Dividend / Stock price = 5.50 / 160.00 = 0.0344

Dividend growth rate = 5%

Therefore, k = 0.0344 + 0.05 = 0.0844 or 8.44%

The closest answer choice is B: 8.4%

Tangshan China's Stock Is Currently Selling for $160