Question

Columbus Manufacturing's stock currently sells for $ 23.57 a share. The stock just paid a dividend of $2 a share (i.e.,D0=2). The dividend is expected to grow at a constant rate of 6 % a year. What is the required rate of return on the company's stock? Express your answer in percentage, and round it to two decimal places, i.e., 13.54, for example for 0.1354)

Answer 1

Answer:

Required rate of return is 14.99%

Explanation:

Given:

Price of stock (Po)= $23.57

Dividend (Do) = $2

Growth rate (g)= 6% or 0.06

Using dividend growth model to calculate required rate of return:

$r=\frac{d_{0}\left ( 1+g \right )}{P_{o}}+g$

Substituting values in above formula, we get:

r = $r=\frac{2\left ( 1.06 \right )}{23.57}+0.06$

 = 0.1499 or 14.99%

Therefore, required return of company's stock is 14.99%