A stock's current price is $25.70 and its next dividend of $3.79 will be paid exactly one year from now. You expect future dividends will grow at a constant rate of 2.2% per year thereafter. What is the stock's required rate of return? Enter your answer as a decimal and show four decimal places. For example, if your answer is 5.25%, enter .0525

To find the stock's required rate of return, we can use the Gordon Growth Model (Dividend Discount Model), which is given by:

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

where:
- $ D_1 $ is the expected dividend one year from now,
- $ P_0 $ is the current stock price,
- $ g $ is the growth rate of dividends.

### Given values:
- $ P_0 = 25.70 $
- $ D_1 = 3.79 $
- $ g = 2.2\% = 0.022 $

### Calculation:

1. **Calculate the dividend yield** (the ratio of $ D_1 $ to $ P_0 $):
   \[
   \frac{D_1}{P_0} = \frac{3.79}{25.70} = 0.1475
   \]

2. **Add the growth rate** $ g $ to the dividend yield to find $ r $:
   \[
   r = 0.1475 + 0.022 = 0.1695
   \]

### Answer:
The stock's required rate of return is **0.1695** (or 16.95%).

Would you like more details, or do you have any questions?

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Here are five additional questions related to this topic:

1. How does the dividend growth rate affect the stock’s required rate of return?
2. What would the required rate of return be if the dividend growth rate was 3% instead of 2.2%?
3. How does a decrease in the current stock price affect the required rate of return?
4. What assumptions does the Gordon Growth Model rely on?
5. How would a change in the next dividend amount impact the required rate of return?

**Tip:** When using the Gordon Growth Model, ensure that the growth rate is less than the required rate of return; otherwise, the model becomes invalid.

Learn how to calculate the required rate of return for a stock using the Gordon Growth Model. The problem involves a stock with a price of $25.70, a next dividend of $3.79, and a dividend growth rate of 2.2%. This solution helps you calculate the stock's required return as 0.1695 or 16.95%.

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