Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.)
A) 13%
B) 16%
C) 20%
D) 21%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model:

Current Price = D1 / (r - g)

Where, 
D1 = Next dividend = $2.75
r = required rate of return
g = dividend growth rate = 9%

Substituting the values, we get:

$37.35 = $2.75 / (r - 0.09)

Solving for r, we get:

r = 0.16 or 16% (rounded to nearest percent)

Therefore, the required rate of return on this stock is 16%. The best choice is B.