An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32, assuming a constant growth rate of 4%. What is the required rate of return g

r = 8.06%

Explanation:

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

P = D (1) / r - g

P: stock price (Given: $57.2)

D (1) : Year-end dividend ($2.32)

g: Dividend growth rate (4%)

r: required return (Missing value)

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

57.2 = 2.32 / (r - 0.04)

--> r = 8.06%