Use the dividend growth model to determine the required rate of return for equity. Your firm has just paid a dividend of $1.50 per share, has a recent price of $31.82 per share, and anticipates a growth rate in dividends of 4.00% per year for the foreseeable future.
A) 8.90%
B) 8.71%
C) 9.09%
D) There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

The required rate of return for equity is the dividend yield plus the growth rate in dividends. The dividend yield is the dividend per share divided by the price per share. The growth rate in dividends is the percentage change in dividends per share from one year to the next. In this case, the dividend yield is $1.50 / $31.82 = 4.71%. The growth rate in dividends is 4.00%. Therefore, the required rate of return for equity is 4.71% + 4.00% = 8.71%.

Use the Dividend Growth Model to Determine the Required Rate