Question

The current yield on Google's common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock? Assume the stock is in equilibrium. Hint: Current yield = Do/Current Price. First, find Po, then find g, and then Rs.

Answer 1

Answer:

The correct answer is 10.04%.

Explanation:

According to the scenario, the computation of the given data are as follows:

$P_{0}$ = Dividend paid ÷ Current yield

$P_{0}$ = $2.10 ÷ 0.048 = 43.75

Now we calculate growth.

Growth (g) = (Next year dividend - Current yield ) ÷ Current yield

Growth (g) = ( $2.205 - $2.10 ) ÷ $2.10

g = 0.05

So, we can calculate the rate of return by using following formula:

$P_{0}$ = Next year dividend  ÷ ( r - g)

By putting value, we get

43.75 = $2.205 ÷ ( r - 0.05 )

r = 10.04%