
The next dividend payment by Savitz, Incorporated, will be $4.25 per share. The dividends are anticipated to maintain a growth rate of 3 percent forever.  
If the stock currently sells for $58 per share, what is the required return?

To find the required return for Savitz, Incorporated, we can use the Gordon Growth Model (also known as the Dividend Discount Model for stocks with constant growth). The formula is:

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

where:

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

Given the values:

- The next dividend, $ D_1 = 4.25 $,
- The growth rate, $ g = 3\% $ or 0.03,
- The current stock price, $ P_0 = 58 $.

We need to solve for the required return, $ r $:

\[
58 = \frac{4.25}{r - 0.03}
\]

Now, solving for $ r $:

\[
58 \cdot (r - 0.03) = 4.25
\]

\[
58r - 1.74 = 4.25
\]

\[
58r = 4.25 + 1.74
\]

\[
58r = 5.99
\]

\[
r = \frac{5.99}{58}
\]

\[
r \approx 0.1033 \text{ or } 10.33\%
\]

So, the required return is approximately **10.33%**.

Would you like more details or have any questions?

Here are some related questions that you might find interesting:

1. How would the required return change if the growth rate increased to 5%?
2. What would be the stock price if the required return was 12%?
3. How does the Gordon Growth Model compare to other stock valuation methods?
4. What happens to the required return if the dividend is expected to decrease over time?
5. How sensitive is the stock price to changes in the dividend growth rate?

**Tip:** When using the Gordon Growth Model, ensure the growth rate is less than the required return; otherwise, the formula won't work as intended because it would imply a negative stock price.

The next dividend payment by Savitz, Incorporated, will be $4.25 per share. The dividends are anticipated to maintain a growth rate of 3 percent forever. If the stock currently sells for $58 per share, what is the required return?

Determine the required return for Savitz, Inc. stock using the Gordon Growth Model. Given a $4.25 dividend, a 3% growth rate, and a stock price of $58, the solution explains step-by-step how to solve for the required return of approximately 10.33%.

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