Use the dividend growth model to determine the required rate of return for equity.Your firm intends to pay a dividend of $1.50 per share one year from today.Further,the recent stock price is $31.82 per share,and you anticipate 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 formula for the dividend growth model is:

Required Rate of Return = (Dividend Payment / Current Stock Price) + Dividend Growth Rate

Plugging in the given values:

Required Rate of Return = ($1.50 / $31.82) + 0.04 = 0.093 or 9.3%

Therefore, the closest answer choice is B, which is 8.71%.

Use the Dividend Growth Model to Determine the Required Rate