Coco Ltd will pay a dividend of $1.30 next year. The dividends are anticipated to maintain a constant annual growth rate of 5% forever. If one share currently sells for $25.70, what is the required return? Group of answer choices 0.06% 5.06% 19.77% 10.06% 24.77%
Question
Coco Ltd will pay a dividend of 25.70, what is the required return?
Group of answer choices
0.06%
5.06%
19.77%
10.06%
24.77%
Solution
To calculate the required return, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula is:
Required Return = (Dividend payment / Price) + Growth Rate
Here, the dividend payment is 25.70, and the growth rate is 5% or 0.05.
So, the required return = (25.70) + 0.05
First, divide 25.70 to get approximately 0.0506.
Then, add this to the growth rate of 0.05 to get approximately 0.1006 or 10.06%.
So, the required return is 10.06%. The correct answer from the given choices is 10.06%.
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