The next dividend payment by Blue Cheese, Inc., will be $1.56 per share. The div

Question

The next dividend payment by Blue Cheese, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $29 per share, what is the required return? (Round your answer to 2 decimal places. (e.g., 32.16))

The next dividend payment by Blue Cheese, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $29 per share, what is the required return? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Accordingto Gordon's Constant Growth model of dividends,

Required rate of return = (Next year,s dividend/share / Current market value/share ) + Growth rate of dividends

ie.                                = (1.56 / 29) + 0.04 = 0.093793

                                                                  = 9.38%

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