Question

The next dividend payment by Dizzle, Inc., will be $2.95 per share. The dividends are anticipated to maintain a growth rate of 4.50 percent, forever. If the stock currently sells for $49.50 per share, what is the required return

Answer 1

Answer: 10.46

Explanation:

To answer this we can use the Constant Growth Model of Stock Valuation. The formula is,

P = D1/(r-g)

Where,

P is the current price,

D1 is the next dividend

g is the expected growth rate in the dividend,

and r is the required rate of return for the company.

Seeing as we have everything else and it is the required return that we seek, let us make 'r' the subject of the formula.

P = D1/(r-g)

P(r-g) = D1

r-g = D1/P

r = D1/P +g

So,

r = 2.95/ 49.50 + 0.045

= 0.10459595959

= 10.46%

the required return is 10.46%