Cullumber, Inc., is expected to grow at a constant rate of 8.00 percent. If the company’s next dividend, which will be paid in a year, is $1.23 and its current stock price is $22.35, what is the required rate of return on this stock?
Values given are
D1 = $1.23 ; Expected dividend
G = 8% ; growth rate
P0 = $22.35 ; current price of stock
R = ?
P0 = D1 / R - G
R = D1 / P0 + G
= 1.23 / 22.35 + 0.08
= 0.055 + 0.08
= 0.135 or 13.5%
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