Question

Redan, Inc., is expected to maintain a constant 4.3 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock?

Answer 1

Dividend Yield = 5.6%
Dividend Yield = (Recent full year dividend)/(Current share price)

Current share price = (Recent full year dividend)/ (Required Rate - Growth Rate)

Now, substituting the value of current share price, we get
Dividend Yield = (Recent full year dividend)/ ((Recent full year dividend)/ (Required Rate - Growth Rate))
Dividend Yield = Required Rate - Growth Rate
5.6%= Required Rate - 4.3%
Required Rate = 5.6%+4.3%=9.90%