Question

question 14
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assume a future expected constant growth of 5%, a dividend of r8, and a current price of r150 per share. what return can an investor expect?

a. 9.9%

b. 10.3%

c. 14.0%

d. 11.0%

clear my choice

Explanation:

Step1: Recall the Gordon - Growth Model formula

The Gordon - Growth Model formula for the required rate of return ($r$) is $r=\frac{D_1}{P_0}+g$, where $D_1$ is the next - year's dividend, $P_0$ is the current stock price, and $g$ is the constant growth rate. Here, $D_1 = 8$, $P_0=150$, and $g = 0.05$.

Step2: Calculate the dividend - yield part

The dividend - yield part $\frac{D_1}{P_0}=\frac{8}{150}\approx0.0533$.

Step3: Calculate the required rate of return

$r=\frac{8}{150}+ 0.05=0.0533 + 0.05=0.1033$ or $10.33\%\approx10.3\%$.

Answer:

B. 10.3%