Question

Question:A firm pays a \(4.80 dividend at the end of year one (D1), has a stock price of \)80, and a constant growth rate (g) of 5 percent. Compute the required rate of return (Ke).

Short answer

Answer

The required rate of return is computed as 5.06%

Step-by-step solution

Given information

Dividend at the end of Year one (D1) is $4.80.

Growth rate (g) is 5%.

Stock price (P0) is $80

Change in Ke when dividend increases (b)

$\begin{array}{rcl}\mathbf{Required}\mathbf{}\mathbf{Rate}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Return}& \mathbf{=}& \frac{\mathbf{D}\mathbf{1}}{\mathbf{P}\mathbf{0}}\mathbf{+}\mathbf{g}\\ & \mathbf{=}& \frac{\mathbf{4}\mathbf{.}\mathbf{80}}{\mathbf{80}}\mathbf{+}\mathbf{5}\\ & \mathbf{=}& \mathbf{5}\mathbf{.}\mathbf{06}\mathbf{\%}\\ & & \end{array}$