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River co. just paid a dividend of $2 per share out of earnings of $4 per share. If its book value per share is $25 and its stock is currently selling for $40 per share, calculate the required rate of return on the stock.

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abiolataiwo2015

Answer:

13.4%

Explanation:

Calculation to determine the required rate of return on the stock.

First step

g = (1 - 0.5)(4/25)

g = 0.08*100

g = 8%

Now let determine the required rate of return

r = [(2 * 1.08)/40] + 0.08

r= 13.4%

Therefore the required rate of return on the stock is 13.4%

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