Macrosoft paid a dividend of $10 per share today (i. e., D₀=$10). The dividends are anticipated to maintain a 10 percent growth rate per year forever. The next dividends will be paid one year from today. If the Macrosoft stock currently sells for $100, what is the required rate of return on the Macrosoft stock?

The required rate of return on Microsoft stock is 21%.

Explanation:

The constant growth model of Dividend Discount Model approach is used to calculate the price or value of a firm whose dividend growth rate is constant. The formula for price today under this model is,

P0 = D0 * (1+g)  /  r - g

Where,

As we know the D0, the price today and the growth rate, we can plug in these values in the formula to calculate the required rate of return (r).

100 = 10 * (1+0.1)  /  (r - 0.1)

100 * (r - 0.1)  =  11

100r - 10 = 11

100r = 11+10

r= 21 / 100

r = 0.21 or 21%

answer; (consensus);