Constant growth: 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? (Round to the nearest percent.)

Question

Quizplus · Accepted Answer

The formula for the required rate of return using the constant growth model is: 
r = (D1 / P0) + g
where r = required rate of return, D1 = next dividend, P0 = current price, and g = constant growth rate. 
Plugging in the given values, we get: 
r = (2.75 / 37.35) + 0.09
r = 0.0737 + 0.09
r = 0.1637 (rounded to 1 decimal place)
Therefore, the required rate of return is approximately 16%, which is closest to choice B (16%).

Constant Growth: Prior, Inc