Question

Macrosoft paid a dividend of $8 per share today (i.e., D0 = $8). The dividends are anticipated to maintain a 8 percent growth rate per year forever. If the Macrosoft stock currently sells for $80, what is the required rate of return on the Macrosoft stock?

Answer 1

Answer:

18%

Explanation:

We can use the Gordon growth model formula to determine the required rate of return:

stock price = dividend / (required rate of return - growth rate)

required rate of return - growth rate = dividend / stock price

required rate of return = (dividend / stock price) + growth rate

required rate of return = ($8 / $80) + 8% = 10% + 8% = 18%