Use the Dividend Growth Model to Determine the Required Rate

question 40

Multiple Choice

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to pay a dividend of $2.25 per share one year from now,has a recent price of $40.20 per share,and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future.

• A)8.76%
• B)8.60%
• C)8.44%
• D)There is not enough information to answer this question.

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Definitions:

Interest Rate

The piece of a loan accruing interest charges against the borrower, usually depicted as an annual percentage of the outstanding loan quantity.

Perfect Asset Market

A theoretical financial market where securities are perfectly liquid, information is freely available to all investors, and there are no transaction costs, allowing for the efficient allocation of assets.

Annual Interest Rate

The percentage rate indicating the total amount of interest paid or earned over a one-year period.

Competitive Market Price

The price established through competition where the amount supplied is equal to the amount demanded.