The common stock of Wetmore Industries is valued at $57.90 a share. The company increases their...

Question:

The common stock of Wetmore Industries is valued at $57.90 a share. The company increases their dividend by 5.3% annually and expects their next dividend to be $3.80.

What is the required rate of return on this stock?

Required Return Of Stock:

The required return on a stock is the return required by the investor to invest in the given stock based on the risk that the stock carries. The risk is dependent on the risk of the firm.

Answer and Explanation:

The required return on the stock is 11.86%

The required return of the stock can be calculated as:

Return = Dividend Yield + Growth Rate

• Dividend Yield = $3.80 / $57.90 = 6.56%
• Growth Rate = 5.30%

Return = 6.56% + 5.30% = 11.86%