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13 September, 11:58

The next dividend payment by Hoffman, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $43.15 per share, what is the required return

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  1. 13 September, 13:30
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    Answer: 6.42%

    Explanation:

    To calculate this, we use the formula for the Dividend Discount Model / Gordon Growth Formula as follows:

    P = D1 / (r - g)

    Where,

    P = current stock price

    D1 = Next dividend

    r = required return

    g = growth rate

    We can make r the subject of the equation by,

    P = D1 / (r - g)

    P (r - g) = D1

    r - g = D1/P

    r = D1/P + g

    Calculating therefore we have,

    r = 2.65/43.15 + 0.045

    = 0.06417728852

    = 6.42%

    6.42% is the required return.

    If you need any clarification do comment.
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