Use the Dividend Growth Model to Determine the Required Rate

question 13

Multiple Choice

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to issue new common stock.Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.75 in one year.If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 8.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?

• A)6.83%
• B)7.08%
• C)7.19%
• D)10.20%

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Definitions:

Net Realizable Value

The estimated selling price of goods, minus the costs of their completion and disposal.

Present Value

The present value of a future amount of money or series of cash flows, assuming a certain return rate.