Given that the correct value of a common stock is $29, the dividend growth rate is 6%, and next period's dividend is $2, using the infinite period Dividend Discount
Model, what is the required rate of return on the common stock?
Click on the arrows to vote for the correct answer
A. B. C. D. E.Explanation
The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. Rearranging this yields k = D1/(current value) + g. In this question, the required rate of return is (2 /
29) + 0.06 = 0.129 = 12.9%.