Answer: 7.25%
Explanation:
To calculate this we will use the Constant Growth Model of calculating a Stock's price.
The formula is,
P = D1/(r-g),
where,
P is the current price,
D is the next dividend the company is to pay,
g is the expected growth rate in the dividend payment and
r is the required rate of return for the company.
We were given the Dividend Yield and with this can calculate the Stock Price.
The Dividend yield is the Dividend expressed as a percentage of Stock Price.
Making the stock price x with the next dividend at $1.54 we have
1.54 = 0.032x
x = 1.54/0.032
= $48.13
Now that we have the stock price we can plug it into the formula.
We also need to calculate the growth rate. Given that $1.48 was paid and $1.54 will be paid we can say,
g= 1.54 - 1.48
g= 0.06/1.48
= 4.05% is what it will take to grow $1.48 to $1.54
Now we can plug all these into the formula,
Making r the subject we have,
r = D1/P + g
= 1.54/48.13 + 0.0405
= 7.25%
The required rate of return on this stock is therefore 7.25%.
