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The next dividend payment by Im, Incorporated, will be $1.96 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $39 per share, what is the required return?

Question

The next dividend payment by Im, Incorporated, will be 1.96pershare.Thedividendsareanticipatedtomaintainagrowthrateof4percentforever.Ifthestockcurrentlysellsfor1.96 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for 39 per share, what is the required return?

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Solution

To find the required return, we can use the Gordon Growth Model. The Gordon Growth Model is given by the formula:

Required Return = Dividend / Stock Price + Growth Rate

Given that the dividend payment is $1.96 per share and the growth rate is 4 percent, we can substitute these values into the formula:

Required Return = 1.96/1.96 / 39 + 0.04

Simplifying this equation, we get:

Required Return = 0.05 + 0.04

Required Return = 0.09

Therefore, the required return for Im, Incorporated's stock is 9 percent.

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