How to Calculate Required Rate of Return for Stock Investment
What is the required rate of return for stock investments?
How can one calculate the required rate of return for a stock investment based on the dividend payment and current stock price?
Required Rate of Return Calculation
The required rate of return (RRR) is the minimum return an investor would accept for owning a company's shares in exchange for a certain level of risk. In corporate finance, the RRR is used to evaluate the profitability of planned investment projects.
The RRR is a subjective measure, as it varies among investors based on their risk tolerance. For example, a retiree may have a lower risk tolerance and be willing to accept a lower return compared to a younger investor with a higher risk appetite.
The formula to calculate the required rate of return is:
Required return = (Dividend payment per share / Current stock price) + Growth rate
Using the given example:
Required return = (1.87 / 37) + 0.043
Required return = 0.0505405405 + 0.043
Required return = 9.35%
Therefore, the required rate of return for the stock investment is 9.35%.