The next dividend payment by Wyatt, Inc., will be $3.40 per share. The dividends

Question

The next dividend payment by Wyatt, Inc., will be $3.40 per share. The dividends are anticipated to maintain a growth rate of 2.25 percent, forever.

If the stock currently sells for $50.40 per share, what is the required return? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

If the stock currently sells for $50.40 per share, what is the required return? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

The required return can be calculated with the use of Gordon's Dividend Growth Model. The formula for calculating required return as per this model is:

Required Return = D1/Current Stock Price + Growth Rate

___________

Solution:

Here, D1 = $3.40, Current Stock Price = $50.40 and Growth Rate = 2.25%

Using these values in the above formula, we get,

Required Return = 3.40/50.40 + 2.25% = 8.99% ot 9% (answer)

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