Grateful Eight Co. is expected to maintain a constant 4.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.2 percent, what is the required return on the company’s stock?

Grateful Eight Co. is expected to maintain a constant 4.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.2 percent, what is the required return on the company’s stock?

Explanation

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is:

R = Dividend yield + Capital gains yield

R = .062 + .044

R = .1060, or 10.60%