How do you solve and or what formula do u use to solve this question: A stock that pays a constant dividend of $2.5 forever currently sells for $24. What is the required rate of return?
To find the required rate of return for a stock that pays a constant dividend forever, you can use the Gordon Growth Model, also known as the Dividend Discount Model. The formula is as follows:
Required Rate of Return = Dividend / Current Stock Price
In this case, the dividend is $2.5, and the current stock price is $24. Plugging these values into the formula:
Required Rate of Return = 2.5 / 24
Calculating this division, we get:
Required Rate of Return ≈ 0.1042 or approximately 10.42%
Therefore, the required rate of return for this stock is approximately 10.42%.