Dividends are equal to $5, and the current share price is $50. Dividends are expected to grow at 2% forever. According to the dividend growth model, what is the investor's required rate of return?

Question

Business

Ariella

29 April, 07:34

Dividends are equal to $5, and the current share price is $50. Dividends are expected to grow at 2% forever. According to the dividend growth model, what is the investor's required rate of return?

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Answers (1)

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Lil Mama · Answer 1

Required rate of return = 12.2%

Explanation:

According to the dividend growth model the price of a stock is

D * (1+G) / R-G

D = dividend

G=growth

R = Required rate of return

In order to find the required rate of return we will put the values given to us in the question into the formula.

D=5

G=2%

Price = $50

50=5 * (1+0.02) / R-0.02

50R-1=5.1

50R=5.1+1

50R=6.1

R=6.1/50

R=0.122=12.2%