Question

Builtrite Furniture just paid an annual dividend of $2.50 last week and investors' believe that dividends will continue to grow at a 8% rate into the future. The current price of Builtrite's common stock is $76. What return do investors' require of Builtrite stock?

Answer 1

Answer:

r = 11.55%

Explanation:

Given that,

Annual dividend paid last week, D1 = $2.50

Dividend growth rate, g = 8%

current price of common stock = $76

Stock price = D1 ÷ (r - g)

$76 = [$2.50 × (1 + 8%)] ÷ (r - 8%)

$76 = 2.7 ÷ (r - 8%)

(r - 8%)  = 0.0355

r = 0.0355 + 0.08

  = 0.1155 × 100

  = 11.55%

Therefore,

Return, r = 11.55%