Question

A stock is expected to maintain a constant dividend growth rate of 4.2 percent indefinitely. If the stock has a dividend yield of 5.5 percent, what is the required return on the stock?

Answer 1

As per constant dividend growth model, required return = (dividend / price per share) + constant growth rate.

(dividend / price per share) is nothing but the dividend yield on the stock.

required return = 5.5% + 4.2% = 9.7%