The current dividend yield of CyTrade’s stock is 3%. The company just paid a $1.48 annual dividend today and will pay a dividend of $1.54 next year. The dividend growth rate is expected to remain at the current level. What is the required rate of return on the stock?

The required rate of return on the stock is 7.1%.

Explanation:

First we will use the dividend yield to find the current stock price.

Dividend yield= Dividend per share/ Share price.

0.03= 1.48/Share price

Share price = 1.48/0.03= 49.33

Next we will find the growth rate of the stock by using next year and this years dividend.

Growth = (Dividend 1-Dividend 0)/Dividend 1

= (1.54-1.48)/1.48=0.04=4%

Now we will input these values in the Gordon growth model in order to find the required return of the stock. The formula is

Stock price= Dividend 1/Required return on equity- Growth rate

49.33=1.54/Required return - 0.04

49.33 required return -1.9732=1.54

49.33 Required return = 1.54+1.9732

Required return = 3.5132/49.33

Required return =0.071

=7.1%

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