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Parker Company stock is currently selling for $150.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Parker's most recent dividend was $5.50, what is the required rate of return on Parker's stock

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Answer: 8.85%

Explanation:

Using the Gordon Growth Model, the variables in the question can be used to calculate stock price so can be reassigned to calculate require return as well.

Stock price = Next dividend / ( Required return - growth rate)

150 = (5.50 * 1.05) / (Required return - 5%)

150 * (Required return - 5%) = ‭5.775‬

Required return - 5% = 5.775/150

Required return = 5.775/150 + 5%

= 8.85%

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