Tell Me Why Co. is expected to maintain a constant 6.4 percent annual growth rat

Question

Tell Me Why Co. is expected to maintain a constant 6.4 percent annual growth rate in its dividends indefinitely. If the company has an annual dividend yield of 8.2 percent, what is the required annual 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 6.4 percent annual growth rate in its dividends indefinitely. If the company has an annual dividend yield of 8.2 percent, what is the required annual 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

Capital gain yield = Growth rate = 6.4% = 0.064

Dividend yield = 8.2% = 0.082

Required return = Dividend yield + Capital gains yield

Required return = 0.082 + 0.064 = 0.146 = 14.60%

Hence, correct answer is 14.60%

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