Question

Brown Inc.​'s annual dividends are indicated below. Find the required rate of return for this​ stock, assuming the future dividend growth rate will remain the same and the company has an infinite horizon. Assume the January​ 1, 2011 price of the stock was $39.00. What was the required return for Brown Inc.Brown Inc.​'s stock?

Year	2001	2002	2003	2004	2005
Dividend	$         0.95	$         1.03	$         1.08	$         1.17	$         1.23
	2006	2007	2008	2009	2010
	$         1.29	$         1.39	$         1.46	$         1.58	$         1.71

What was the estimated annual required return for Brown Inc.​'s ​stock? ​(Round to two decimal​ places.)

Answer 1

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Dividend	0.95	1.03	1.08	1.17	1.23	1.29	1.39	1.46	1.58	1.71
% YoY Growth		8.4%	4.9%	8.3%	5.1%	4.9%	7.8%	5.0%	8.2%	8.2%
Dividend Discount Model (Gordan Growth Model)	P=D0*(1+g)/(R-g)
Where D0=	Dividend in 2010
g=	growth rate of dividends in the future, here that will be growth rate of dividends in year 2010 i.e 8.2%
R=	Required return on stock, to be found out
P=	Price of the stock in 2011, 39
Thus to get , we rearrage the equation
	D0*(1+g)/P+g
Plugging in the values,
Required Return=	12.9%	<--1.71*(1+8.2%)/39+8.2%

We can calculate the required return using gordan growth model of equity valuation.

Here as per the model the required return is 12.9%

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