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30 November, 09:50

Mercier Corporation's stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent. What is the required rate of return on this stock?

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  1. 30 November, 10:18
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    r = 13.68%

    Explanation:

    We can use Gordon growth model to calculate the stock price.

    P = Do x (1+g) / r - g

    P: stock price (Given: $95)

    Do: Last dividend paid ($5)

    g: Dividend growth rate (8%)

    r: required return (Missing value)

    By inputting the number into the above equation, we have the following:

    95 = 5 x 1.08 / (r - 0.08)

    --> r = 13.68%
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