Question

Judy's Boutique just paid an annual dividend of $1.48 on its common stock and increases its dividend by 2.2 percent annually. What is the rate of return on this stock if the current stock price is $29.60 a share?

Answer 1

Answer:

7.31%

Explanation:

Data provided in the question:

Annual dividend paid, D0 = $1.48

Dividend growth rate, g = 2.2% = 0.022

Current stock price per share = $29.60

Now,

Current price of share = D1 ÷ (r - g)      .........(1)

Here,

r is the required rate of return

D1 = dividend at year 1 =  D0 × (1 + g)

= $1.48 × (1 + 0.022)

= $1.51256

Therefore, from (1) we get

$29.60 = $1.51256 ÷ (r - 0.022)

or

(r - 0.022) = 0.0511

or

r = 0.0511 + 0.022

or

r = 0.0731

or

r = 0.0731 × 100% = 7.31%