Answer:
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%
