The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?
A) 10.04%
B) 16.07%
C) 21.88%
D) 43.75%
E) 45.94%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model: Required return = (Dividend next year / Current stock price) + Growth rate. The growth rate is (2.205 - 2.10) / 2.10 = 5%. The current yield is 4.8%, which implies the dividend yield is 4.8%. Therefore, the required rate of return is 4.8% + 5% = 9.8%, which is closest to 10.04%.

The Current Yield on Alpha's Common Stock Is 4