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The next dividend payment by Skippy, Inc., will be $2.95 per share. The dividends are anticipated to maintain a growth rate of 4.8%, forever. If the stock currently sells for $53.10 per share, what is the required return?

Respuesta :

Shahzaibfaraz

Answer:

r = 0.103555  or  10.3555%  rounded off to 10.36%

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

  • D1 is dividend expected for the next period /year
  • g is the growth rate
  • r is the required rate of return or cost of equity

Plugging in the values for D0, P0 and g in the formula, we can calculate r to be,

53.1 = 2.95 / (r - 0.048)

53.1 * (r - 0.048) = 2.95

53.1r - 2.5488  =  2.95

53.1r  =  2.95+ 2.5488

r  =  5.4988 / 53.1

r = 0.103555  or  10.3555%  rounded off to 10.36%

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