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1 April, 18:58

Grateful Eight Co. is expected to maintain a constant 4.6 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.4 percent, what is the required return on the company's stock?

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  1. 1 April, 22:40
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    11%

    Explanation:

    To address this exercise, we need to recall the formula for dividend discounted model (DDM). The DDM is stated as below:

    Stock intrinsic value = Next year dividend / (Required rate of return - Long term growth)

    Rearrange a bit this formula, we have:

    Next year dividend/Stock intrinsic value = Required rate of return - Long term growth, or

    Dividend yield = Required rate of return - Long term growth

    Putting all the number together, we have:

    6.4% = Required rate of return - 4.6% or Required rate of return = 11%
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