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27 October, 04:13

Builtrite Furniture just paid an annual dividend of $2.50 last week and investors' believe that dividends will continue to grow at a 8% rate into the future. The current price of Builtrite's common stock is $76. What return do investors' require of Builtrite stock?

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  1. 27 October, 07:11
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    r = 11.55%

    Explanation:

    Given that,

    Annual dividend paid last week, D1 = $2.50

    Dividend growth rate, g = 8%

    current price of common stock = $76

    Stock price = D1 : (r - g)

    $76 = [$2.50 * (1 + 8%) ] : (r - 8%)

    $76 = 2.7 : (r - 8%)

    (r - 8%) = 0.0355

    r = 0.0355 + 0.08

    = 0.1155 * 100

    = 11.55%

    Therefore,

    Return, r = 11.55%
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