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kifflom [539]
3 years ago
15

Tell Me Why Co. is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the company has a div

idend 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 %
Business
1 answer:
Anestetic [448]3 years ago
7 0

Answer:

The required rate of return for the company is 13.8%

Explanation:

<u>Dividend yield: </u> return of the stock considering his market value:

dividend / Price = dividends yield = 7.7% = 0.078

<u>grow</u> = 6% = 0.06

<u>We use the gordon model to solve for required return:</u>

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

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

0.078 + 0.06 = return

<em>return</em> = 0.138 = 13.8%

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