This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.
Penelope purchased 500 shares of BIF for $10,000. BIF stock is currently paying $400 of annual dividend income to Penelope. Dividends are expected to grow 4% annually. BIF stock is currently priced at $56.
Identify Penelope’s required rate of return.
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Instructor insight:
Use the required rate of return formula for dividend-paying securities to solve:
r = required rate of return
D1 = Dividend (D0 x (1 + g))
P = Price of the stock
g = fixed, stable growth rate
Dividends are expected to grow 4% annually. The dividend/share is ($400/500 shares). BIF stock is currently priced at $56.
r = 0.0549, or 5.49%
CFP® Exam insight:
Remember to advance the dividend that is currently paid by multiplying by (1 + g) with g expressed as a decimal.
D1 = Dividend (D0 x (1 + g))