Question

ABC, Inc., just paid a dividend of $1.56, and the company expect to grow its dividend at a constant rate of 4%. What is ABC's required rate of return if its today's value based on the dividend discount model is $42.16, ? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Rate of Return?

Answer 1

Required rate of return = (D1 / price) + growth rate

Required rate of return = [1.56(1 + 4%) / 42.16] + 0.04

Required rate of return = [1.6224 / 42.16] + 0.04

Required rate of return = 0.038482 + 0.04

Required rate of return = 0.0785 or 7.85%