Answer:
Required rate of return = 10.75%
Explanation:
The value of a stock using the dividend valuation model, is the present value of the expected future dividends discounted at the required rate of return. The required rate of return is the cost of equity
The model is represented below:
P = D× (1+g)/ ke- g
Ke- cost of equity, g - growth rate, p - price of the stock
This model can used to work out the cost of equity, as follows:
Ke = D× (1+g)/p + g
Ke = (1.48× 1.05)/27 + 0.05
Ke= 0.107555556
Required return = 0.1075 × 100 = 10.75
Required rate of return = 10.75%
