# A company is expected to maintain a constant 3 percent growth rate in its dividends indefinitely....

## Question:

A company is expected to maintain a constant 3 percent growth rate in its dividends indefinitely. If the company's stock has a dividend yield of 4.85 percent, what is the required return on the stock?

## Dividend Yield:

The dividend yield is the ratio of the annual dividend per share relative to the current price per share and it is expressed as a percentage. It simply indicates the return from equity investment by considering only the dividends received over a period of time. Company's that offer high dividend yield usually have declining stock prices and vice-versa.

The required return of the company's stock is 7.85%.

Explanation:

As per the data:

• Constant dividend growth rate, g = 3%
• Dividend yield = 4.85%

Computation:

• Required return = Dividend yield + Constant growth rate
• Required return = 4.85% + 3%
• Required return = 7.85%

Note:

Dividend yield = (Dividend / Current share price) 