Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.0%, what is the required return on the company's stock?
Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.0%, what is the required return on the company's stock?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Transcription for Educational Website**
**Garage, Inc.'s Stock Return Calculation**
Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.0%, what is the required return on the company's stock?
**Options:**
- 11.00%
- 11.53%
- 11.3%
- 11.33%
- 11.8%
**Explanation of Concepts:**
The required return on a company's stock can be calculated using the Gordon Growth Model (Dividend Discount Model), which is expressed as:
\[ \text{Required Return} = \text{Dividend Yield} + \text{Growth Rate} \]
Given:
- Dividend Yield = 5.0%
- Growth Rate = 6%
\[ \text{Required Return} = 5.0\% + 6\% = 11\% \]
Understanding these calculations can help investors make informed decisions about their investments in stocks that pay dividends.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F537cca7c-787a-475d-9aba-926e9a602de3%2F9c86cb7f-f32b-4f53-ac0a-9445236a3b81%2Foel3rlk_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Transcription for Educational Website**
**Garage, Inc.'s Stock Return Calculation**
Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.0%, what is the required return on the company's stock?
**Options:**
- 11.00%
- 11.53%
- 11.3%
- 11.33%
- 11.8%
**Explanation of Concepts:**
The required return on a company's stock can be calculated using the Gordon Growth Model (Dividend Discount Model), which is expressed as:
\[ \text{Required Return} = \text{Dividend Yield} + \text{Growth Rate} \]
Given:
- Dividend Yield = 5.0%
- Growth Rate = 6%
\[ \text{Required Return} = 5.0\% + 6\% = 11\% \]
Understanding these calculations can help investors make informed decisions about their investments in stocks that pay dividends.
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