Mercier Corporation's stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividend is 8%. What is the required rate of return on this stock?
Let use the following price model
P = D( 1 + g ) / ( r - g )
where
P = stock price = $95
D = dividend = $5
r = required rate of return = ??
g = growth rate = 8%
Therefore,
95 = 5( 1 + 8% ) / ( r - 8% )