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Suppose Paccar's current stock price is $108.26 and it is likely to pay a $3.06 dividend next...

Question:

Suppose Paccar's current stock price is $108.26 and it is likely to pay a $3.06 dividend next year.

Since analysts estimate Paccar will have an 5.6% growth rate, what is its required return? (Round your answer to 2 decimal places.)

Required Return:

The required return on an asset is the return demanded by the investor who invests in the given asset. The return is based on the risk of the asset and in an efficient market is the same for all types of investors.

Answer and Explanation:


The required return is 8.43%


We can use the dividend growth model to solve for the required return:

{eq}Price = \dfrac{D_{1}}{r-g} {/eq}

Here:

  • D1 is the next year dividend = $ 3.06
  • r is the investors' required return which is to be ascertained
  • g is growth rate = 5.6%
  • Price = $108.26

Using the aforementioned values into the formula we have:

{eq}$108.26 = \dfrac{ $ 3.06 }{r-0.056} {/eq}

{eq}r - 0.056 = \dfrac{ $ 3.06 }{ $108.26 } {/eq}

{eq}r - 0.056 = 0.0283 {/eq}

{eq}r = 0.0843 {/eq}


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.5K

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