QuestionAugust 21, 2025

Flywell Airlines will pay a 4 dividend next year on its common stock, which is currently selling at 100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? A 4 percent. B 5 percent. C 7 percent. D 9 percent.

Flywell Airlines will pay a 4 dividend next year on its common stock, which is currently selling at 100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? A 4 percent. B 5 percent. C 7 percent. D 9 percent.
Flywell Airlines will pay a 4 dividend next year on its common stock, which is currently selling at 100 per share. What is the market's required return on
this investment if the dividend is expected to grow at 5%  forever?
A
4 percent.
B
5 percent.
C
7 percent.
D
9 percent.

Solution
4.6(169 votes)

Answer

D 9 percent. Explanation 1. Identify the formula Use the **Dividend Growth Model**: r = \frac{D_1}{P_0} + g, where r is the required return, D_1 is the dividend next year, P_0 is the current stock price, and g is the growth rate. 2. Substitute values into the formula Given D_1 = 4, P_0 = 100, and g = 0.05. Substitute these values: r = \frac{4}{100} + 0.05. 3. Calculate the required return Compute: r = 0.04 + 0.05 = 0.09 or 9\%.

Explanation

1. Identify the formula<br /> Use the **Dividend Growth Model**: $r = \frac{D_1}{P_0} + g$, where $r$ is the required return, $D_1$ is the dividend next year, $P_0$ is the current stock price, and $g$ is the growth rate.<br /><br />2. Substitute values into the formula<br /> Given $D_1 = 4$, $P_0 = 100$, and $g = 0.05$. Substitute these values: $r = \frac{4}{100} + 0.05$.<br /><br />3. Calculate the required return<br /> Compute: $r = 0.04 + 0.05 = 0.09$ or $9\%$.
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