Question

Tell Me Why Co. is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 7.8 percent, what is the required return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Answer 1

Answer:

The required rate of return for the company is 13.8%

Explanation:

Dividend yield: return of the stock considering his market value:

dividend / Price = dividends yield = 7.7% = 0.078

grow = 6% = 0.06

We use the gordon model to solve for required return:

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

$\frac{divends}{Intrinsic \: Value} = return - 0.06$

$0.078 + 0.06 = return$

return = 0.138 = 13.8%