Question

ole Company’s stock currently sells for $20 per share. It just paid dividends of $1.00 per share. The dividend is expected to grow at a constant rate of 6% a year. What is the required rate of return

Answer 1

Answer:

The required rate of return is 11%

Explanation:

Dividend valuation method calculated the value of stock based on dividend payment, growth rate and required rate of return.

Use following formula to calculate the the required rate of return

Price =  Dividend / ( Required Rate of return - Growth rate )

20 =  $1 / ( Required Rate of return - 6% )

20 =  $1 / ( Required Rate of return - 0.06 )

Required Rate of return - 0.06 = $1 / $20

Required Rate of return - 0.06 = 0.05

Required Rate of return = 0.05 + 0.06

Required Rate of return = 0.11

Required Rate of return = 11%