What Would You Estimate to Be the Required Rate of Return

question 120

Multiple Choice

What would you estimate to be the required rate of return for equity investors if a stock sells for $40 and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%?

• A)7.6%
• B)12.0%
• C)12.6%
• D)16.0% r_equity =

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Definitions:

Yield to Maturity

The total return anticipated on a bond if the bond is held until its maturity date, accounting for interest payments and capital gain or loss.

Zero Coupon Bonds

Bonds that do not pay interest during their lifetime but are issued at a discount and redeemed at face value at maturity.

Capital Structure

The composition of a company's liabilities and shareholders' equity, detailing how a firm finances its overall operations and growth by using different sources of funds.

Cost of Equity

The rate of return that a company needs to generate in order to compensate its equity investors, taking into account the risk associated with the investment.