Question

Grateful Eight Co. is expected to maintain a constant 3.7 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock?

Answer 1

Answer:

Ke 0.095072 = 9.5072%

Explanation:

We will work the horizon value formula to get the required turn of the firm:

$\frac{divends}{return-growth} = Intrinsic \: Value$

$\frac{divends}{Price} = return-growth$

$\frac{divends}{Price} + growth = return$

$Cost of Equity =\frac{D_1}{P)} +g$

Given that the dividend yield is 5.6

that means that means the dividends are 5.6% of the stock price

As the horizon is calculated with the next year dividends we will multiply it by the growth rate:

D1 5.6 x (1+3.7%) = 5.8072

P 100

f 0.00

g 0.037

$Cost of Equity =\frac{5.8072}{100} +0.037$

Ke 0.095072

Answer 2

Answer:

Required rate of return = 9.3%

Explanation:

Dividend yield is the rate of dividend based on the price of the share.

The formula for dividend yield is,

Dividend yield = Dividend / Price

Thus, D1 / P0 = 0.056

For a constanat growth stock, the price of share is calculated using the following formula,

P = D1 / r-g

Rearranging the formula for r, we get,

r = (D1 / P0) + g

Thus, r = 0.056 + 0.037 = 0.093  or 9.3%