Question

The next dividend payment by Grenier, Inc., will be $1.48 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $27 per share, what is the required return

Answer 1

Answer:

Required rate of return = 10.75%

Explanation:

The value of a stock using the dividend valuation model, is the present value of the expected future dividends discounted at the required rate of return. The required rate of return is the cost of equity

The model is represented below:

P = D× (1+g)/ ke- g

Ke- cost of equity, g - growth rate, p - price of the stock

This model can used to work out the cost of equity, as follows:

Ke = D× (1+g)/p + g

Ke = (1.48× 1.05)/27   + 0.05

Ke= 0.107555556

Required return =  0.1075  × 100 = 10.75

Required rate of return = 10.75%