Question

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? Select one:
a. 12.75 percent
b. 13.39 percent
c. 9.08 percent
d. 15.82 percent
e. 10.86 percent

Answer 1

Answer:   The correct answer is :  e.  10.86 percent

Step-by-step explanation:  The current yield is 1.89% = 1.89 / 100 = 0.0189

The rate of return (R) is:

R =  0.0189 +  [ (1.70 - 1.56) / 1.56 ]

R =  0.0189 + 0.0897

R =  0.1086

R =  0.1086 x 100

R =  10.86%

The required rate of return is the minimum return that an investor needs to be calm, it is the amount of profit needed to justify continuing a project or an investment.