Question: Compute the required rate of return or the dividend growth rate.
(a) ABC is expected to pay a dividend of $2.50 in the coming year, which is expected to grow indefinitely at 5%. If the current value of ABC's shares based on the constant-growth dividend discount model is $60, what is the required rate of return, k?
(b) Given a required rate of return of 6%, ABC stock will pay a year-end dividend of $1 per share. If the stock is selling at $50 per share, what must be the market's expectation of the growth rate of ABC dividends, g?
(c) The risk-free rate of return is 2.5%, the required rate of return on the market is 11.5%, and ABC stock has a beta coefficient of 1.15.What is the required rate of return on ABC's stock based on the CAPM?