A firm has a current book value per share of $21.10 and a market price per share of $37.57. Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent. What is the required rate of return on this stock?
A)14%
B)15%
C)16%
D)17%
E)18%

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model, we can solve for the required rate of return:
$37.57 = $5.60 / (r - 2.5%)
$r = 16.01%, rounded to 16%
Therefore, the answer is Choice C, 16%.

A Firm Has a Current Book Value Per Share of $21.10