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Question:

An analyst determines that a company has a return on equity of 16% and pays 40% of its earnings in dividends. If the firm recently paid a $1.50 dividend and the stock is selling for $40, what is the required rate of return on the stock if it is priced according to the dividend discount model?

A 13.7%.
explanation

1212g = (1 - payout)(ROE) = (1 - 0.40)(l6%) = 9.6%

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