Based on the dividend, the the current price and the growth rate, the required rate of return is 11%.
What is the required rate of return?
This can be found by the formula:
= Next dividend / Current market price + Growth rate
Growth rate = EPS / Book value of share x (1 - Payout ratio)
= 5 / 40 x (1 - 0.60)
= 5%
Next dividend = Current dividend x ( 1 + growth rate)
= 3 x 1.05
=$3.15
Required return is:
= 3.15 / 52.50 + 0.05
= 11%
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