1 answer

The next dividend payment by Savitz, Inc., will be $4.75 per share. The dividends are anticipated...

Question:

The next dividend payment by Savitz, Inc., will be $4.75 per share. The dividends are anticipated to maintain a growth rate of 2 percent forever. If the stock currently sells for $43 per share, what is the required return?


Answers

Given for Savitz, Inc.

Dividend next year D1 = $4.75

growth rate g = 2%

Current stock price P0 = $43

Let required rate of return be Ke

So, by constant dividend growth model, we know that

P0 = D1/(Ke- g)

So, 43 = 4.75/(Ke-0.02)

=> Ke = 13.05%

So, required rate of return = 13.05%

.

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