Chapter 9, Problem 32QAP

Summary Introduction

Adequate information:

Dividend per share for the current year (D₀) = $2.95

Require rate of return (R) = 13%

Dividend growth rate in Year 1 (g₁) = 20%

Dividend growth rate in Year 2 (g₂) = 15%

Dividend growth rate in Year 3 (g₃) = 10%

Dividend growth rate in Year 4 (g₄) = 5%

To determine: The required return that the investors must demand on the company’s stock.

Introduction: The dividend growth model computes the stock price with the help of the growth rate, required rate, and dividend for the next period.