Hello:
This problem has already been solved, but I don't understand how the formula we were given, mutated to whatever we used to actually solve the problem.
The price of Loring Corp. today is $35. If Loring plans to pay a $.70 dividend this year and paid a $0.67 dividend last year, what is the required rate of return on Loring (you expect last year’s growth rate to continue in the future)?
The formula: r = D/P + g
But to actually solve it, somehow (for somebody not used to accounting) you had to know:
RRR = D(1 + g)/P + g ??
So to find g, .70/.67 - 1 = .0448
RRR = .70(1.0448)/$35 + .0448 = .0657%
So my question I guess is, what are we finding when they're asking for the RRR. I don't understand why we multiplied .70 by the growth rate and added it as well?
Thanks for any help, I'm confused by the working maybe.