The current market price of a company’s share is Rs. 90 and the expected dividend per share next year is Rs. 4.50. If the dividends are expected to grow at a constant rate of 8%, the shareholders required rate of return is:

The correct answer is 13%.

Key Points

To calculate the shareholders' required rate of return, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula for the required rate of return is:

Required Rate of Return = (Dividend per Share / Current Market Price) + Dividend Growth Rate

Given the following information:

Current Market Price of the share = Rs. 90
Expected Dividend per Share next year = Rs. 4.50
Dividend Growth Rate = 8% (0.08)

Plugging these values into the formula, we can calculate the required rate of return:

• Required Rate of Return = (4.50 / 90) + 0.08
• Required Rate of Return = 0.05 + 0.08
• Required Rate of Return = 0.13 or 13%

Therefore, the shareholders' required rate of return is 13%. This means that investors would expect a return of 13% per year from holding the company's shares, taking into account the expected dividend and the growth rate of the dividends.

Hence, the correct answer is 13%