Fris B.Corporation share 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 shares.

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model): Required Rate of Return = (Dividend / Current Price) + Growth Rate = ($3.00 / $42.86) + 0.03 = 0.07 or 7%.

Fris BCorporation Share Is Currently Selling for $42