Grateful Eight Co. is expected to maintain a constant 3.8 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: 0.094

Explanation:

The required return of a stock consists of two parts which are the dividend yield and the capital gains yield. Therefore, the required return of this stock is:

R = Dividend yield + Capital gains yield

R = 0.056 + 0.038

R = 0.094 or 9.40%