Question

Suppose Microsoft, Inc. is trading at $27.29 per share. It pays an annual dividend of $0.32 per share, which is double its last year’s dividend of $0.16 per share. If this trend is expected to continue, what is the required return (discount rate) on Microsoft? Comment on the value of the required return. Hint: Use the Gordon Growth Model.

Answer 1

Answer:

r = 101.17%

Explanation:

The formula for required return using Gordon Growth Model is;

r = $\frac{D1}{Price} +g$

D1 = Next year's dividend = $0.32

Price = $27.29

g= growth rate = 100% or 1.0 as a decimal

r = $\frac{0.32}{27.29} +2$

r =0.01173+1

r = 1.01173

As a percentage = 1.01173 *100 = 101.17%