A stock just paid a dividend of $4.17 and is expected to maintain a constant dividend growth rate of 4.5 percent indefinitely. If the current stock price is $70, what is the required return on the stock?

Explanation:

Dividend = 4.17$

growth rate= 4.5%

Current stock price = 70$

Required return = ?

required return = dividend next year / current stock price + growth rate

Required Return = 4.17 /70+4.5%

                           = 1.323%

The required return on the stock is 10.73%

Explanation:

The required return can deduced from the stock price formula given below:

Price=Do*(1+g)/r-g

Price is $70

Do is the dividend just paid is $4.17

g is the growth rate of dividend at 4.5%

r is the required return which is the unknown

$70=$4.17*(1+0.045)/r-0.045

$70=$4.17*(1.045)/r-0.045

by cross-multiplication the equation becomes

$70*(r-0.045)=$4.17*1.045

r-0.045=$4.17*1.045/70

r=($4.17*1.045/70)+0.045

r=10.73%

The required return on this investment is 10.73%

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