Fris B. Corporation stock is currently selling for $42.86. It is expected to pay a dividend of $3.00 at the end of the year. Dividends are expected to grow at a constant rate of 3% indefinitely. Compute the required rate of return on FBC stock.
A) 10%
B) 33%
C) 7%
D) 4.3%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Required Rate of Return = (Dividend Payment / Current Stock Price) + Growth Rate. Plugging in the values: (3 / 42.86) + 0.03 = 0.07 + 0.03 = 0.10 or 10%.

Fris B Corporation Stock Is Currently Selling for $42