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Pani-rosa [81]
2 years ago
8

A company currently pays a dividend of $2.40 per share. The current price of the stock is $18.22. It expects the growth rate of

the dividend to be 2.5% (0.025) annually. What is the required return rate for this stock according to the dividend-discount model
Business
1 answer:
bogdanovich [222]2 years ago
5 0

Answer:

The required rate of return is 16%

Explanation:

The constant growth model of the DDM is used whenever the dividends are expected to grow at a constant rate in the future forever. The formula for the constant growth model to calculate the price of the share today is,

P0 = D1 / r-g

Where D1 is dividend next year or D0 *(1+g)

r is the required rate of return

g is the growth rate in dividends

Plugging in the available variables, we can calculate the required rate of return (r).

18.22 = 2.4 * (1+0.025) / r - 0.025

18.22 * (r-0.025) = 2.46

18.22r - 0.4555 = 2.46

18.22r = 2.46 + 0.4555

r = 2.9155 / 18.22

r = 0.1600 or 16.00%

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<h3>What Is the Security Market Line?</h3>

The security market line (SML) is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model (CAPM)—which shows different levels of systematic, or market risk, of various marketable securities, plotted against the expected return of the entire market at any given time.

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