The Lory Company had net earnings of €127,000 this past year.Dividends were paid of €38,100 on the company's equity of €1,587,500.If Lory has 100,000 shares outstanding with a current market price of €11.625 per share,what is the required rate of return?
A)4.2%
B)6%
C)9%
D)14%
E)None of the above.

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the dividend discount model:

Required rate of return = (Dividend per share / Market price per share) + Growth rate

Dividend per share = Total dividends paid / Number of shares outstanding 
Dividend per share = €38,100 / 100,000 shares = €0.381 per share

Growth rate can be calculated using the formula:

Growth rate = (Net earnings - Dividends paid) / Equity 
Growth rate = (€127,000 - €38,100) / €1,587,500 = 0.055 or 5.5%

Required rate of return = (0.381 / 11.625) + 0.055 = 0.09 or 9%

Therefore, the answer is C) 9%.

The Lory Company Had Net Earnings of €127,000 This Past