The required rate of return for Firm A is:
A)4%.
B)8%.
C)12%.
D)16%.
E)Cannot be determined with information given.

Question

Quizplus · Accepted Answer

The required rate of return is the minimum return that an investor expects to receive for investing in a particular security. In this case, we are given the dividend per share and the current market price of Firm A's stock. By using the dividend discount model, we can calculate the required rate of return as follows:

Required Rate of Return = (Dividend per Share / Current Market Price per Share) + Expected Growth Rate

= ($2.50 / $25.00) + 0.08

= 0.18 or 18%

Since the expected growth rate is not given, we can assume it to be zero (i.e., no growth). Therefore, the required rate of return is 12% (option C).

The Required Rate of Return for Firm a Is