Calculate Required Rate of Return (k) - Definition, Formula and Example

Definition:

Required Rate of Return refers to the amount derived or expected to be derived from an investment.

Formula :

Where, g is Constant Growth rate

Example :

In the current situation, price of Raj's share is 100000. His annual dividend is 1000 per share and his required rate of return is 10%. Compute his Required rate of Return (k)?

Given,

Current Annual Dividend = 1000 Current Price = 100000 Constant Growth Rate (g) = 8.9109 %

To find,

Required Rate of Return (k)

Solution:

k = 8.9109% + [1000 * (1 + 8.9109%) / 100000] k = 0.089109 + [(1000 * 1.089109) / 100000] k = 0.089109 + [1089.109 / 100000] k = 0.089109 + 0.01089109 k = 0.10000009 k = 10%