Question

The Hopkinton Company just paid $2.25 as its annual dividend. The dividends have been increasing at a rate of 5% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock

Answer 1

Answer:

8.54%

Explanation:

we need to determine the required rate of return using the perpetuity growth formula:

stock price = dividend / (required rate of return - growth rate)

$63.60 = $2.25 / (required rate of return - 5%)

required rate of return - 5% = $2.25 / $63.60

required rate of return - 5% = 3.54%

required rate of return = 3.54% + 5% = 8.54%