(Q. 19 IN B) ABC CORP. HAS JUST PAID A $5 PER SHARE DIVIDEND. THE...

16. (Q. 19 in B) ABC Corp. has just paid a $5 per share dividend. The dividend is projected to grow at 5% per year indefinitely. If the stock sells today for $65.625, what is the required rate of return on ABC stock? A) 6.25%B) 6.75% C) 13% D) 13.5% Solution C P

0

= D

1

/(r - g) rearranging the formula we get r = D

1

/P

0

+ g where D

1

= D

0

x (1+g) = $5 x (1+ 0.05) = $5.25; P

0

= $65.625; g = 5% r = $5.25/$65.625 + 0.05 r = 13%