Question

Global Travels, Inc. will make a dividend payment next year of $2.65 per share. After that, the expectation is for the dividends to grow at a rate of 4.5 percent indefinitely. If the stock currently sells for $49.15 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Answer 1

As per Gordon Growth model,

Current stock price, P0 = D1/ (k -g)

D1 = Dividend in next period = $ 2.65

k = Required rate of return

g = Dividend growth rate = 0.045

$ 49.15 = $ 2.65/ (k – 0.045)

k – 0.045 = $ 2.65/$ 49.15

               = 0.0539165818921668

k = 0.0539165818921668 + 0.045

= 0.0989165818921668 or 9.89 %

Required return is 9.89 %