Grateful Eight Co. is expected to maintain a constant 6.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.6 percent, what is the required return on the company’s stock?

Problem 8-5 Stock Valuation [LO1]
Grateful Eight Co. is expected to maintain a constant 6.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.6 percent, what is the required return on the company’s stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is:

R = Dividend yield + Capital gains yield
R = .086 + .068
R = .1540, or 15.40%