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

Question

Quizplus · Accepted Answer

The formula for required rate of return (k) is k = (Dividend per share/Market price per share) + Growth rate.

First, we need to find the total dividend paid: 
Dividends = Number of shares x Dividend per share 
$38,100 = 100,000 x Dividend per share 
Dividend per share = $0.381

Then, we can calculate the expected dividend for next year: 
Expected dividend = Dividend per share x (1 + Growth rate) 
Expected dividend = $0.381 x 1.056 = $0.402

Next, we can calculate the dividend yield: 
Dividend yield = Expected dividend / Market price per share 
Dividend yield = $0.402 / $11.625 = 0.0346

Finally, we can use the formula to solve for the required rate of return: 
k = 0.0346 + 0.056 = 0.0906 or 9%

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