Newton, Inc.just paid an annual dividend of $0.95.Their dividends are expected to increase by 4% annually.Newton Company stock is selling for $11.54 a share.What is the required rate of return on this stock implied by the dividend-growth model?

Question

Quizplus · Accepted Answer

Using the dividend growth model, we can calculate the implied required rate of return as follows:

Required Rate of Return = (Expected Dividend / Current Stock Price ) + Dividend Growth Rate

Required Rate of Return = (0.95 * 1.04 / 11.54) + 0.04
Required Rate of Return = 0.08639 or 8.64% + 4%
Required Rate of Return = 12.64%

Therefore, the correct answer is C) 12.6%.