Tell Me Why Co. is expected to maintain a constant 6.8 percent growth rate in it

Question

Tell Me Why Co. is expected to maintain a constant 6.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.6 percent, what is the required return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Tell Me Why Co. is expected to maintain a constant 6.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.6 percent, what is the required return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Dividen Yield is the return in the form of dividend on current Market Price.

Let Current Market Price(P0) is $ 100

Dividend Yield is 8.6%

Thus, Dividend (D1)is $ 8.6

Growth Rate(g) is 6.8%

Required return (Ke)=?

From Dividend Discount Model,

P0= D1/(Ke-g)

100 = 8.6/(Ke-.068)

100*(Ke-.068) =8.6

100Ke-6.8 =8.6

100 Ke = 15.4

Ke = 0.154

Ke = 15.4%

Thus, Required return on Stock is 15.4 %

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