The next dividend payment by Im, Incorporated, will be $3.00 per share. The dividends are anticipated to maintain a growth rate of 4.25 percent forever. If the stock currently sells for $49.60 per share, what is the required return?

Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.



The required return on a stock can be calculated using the **Dividend Discount Model (DDM)**, also known as the **Gordon Growth Model**. The formula is:

\[
r = \frac{D_1}{P_0} + g
\]

Where:
- $ r $ is the required return
- $ D_1 $ is the dividend in the next period
- $ P_0 $ is the current stock price
- $ g $ is the growth rate of the dividends

### Given:
- Next dividend ($ D_1 $) = $3.00
- Current stock price ($ P_0 $) = $49.60
- Dividend growth rate ($ g $) = 4.25% or 0.0425

Now, applying the values to the formula:

\[
r = \frac{3.00}{49.60} + 0.0425
\]

### Step-by-step Calculation:

1. First, calculate the dividend yield:
\[
\frac{3.00}{49.60} = 0.06048387
\]

2. Add the dividend growth rate:
\[
r = 0.06048387 + 0.0425 = 0.10298387
\]

3. Convert to a percentage and round to two decimal places:
\[
r = 10.30\%
\]

### Final Answer:
The required return is **10.30%**.

---

Would you like more details on any of the steps or have further questions?

Here are five related questions:
1. How does changing the dividend growth rate affect the required return?
2. What happens to the required return if the stock price increases?
3. How would the required return change if the dividend were expected to decrease?
4. Can the Dividend Discount Model be applied to stocks with non-constant growth rates?
5. How does the required return differ from the expected return?

**Tip**: Always check the growth rate assumption when applying the Dividend Discount Model—constant growth models may not work well for stocks with fluctuating dividends.

The next dividend payment by Im, Incorporated, will be $3.00 per share. The dividends are anticipated to maintain a growth rate of 4.25 percent forever. If the stock currently sells for $49.60 per share, what is the required return?

Find out how to calculate the required return on a stock using the Dividend Discount Model. This finance problem involves a dividend of $3.00 per share, a stock price of $49.60, and a dividend growth rate of 4.25%. Suitable for undergraduate finance students.

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