Calculating Required Return A drawback of the dividend growth model is the need to estimate the growth rate of dividends. One way to estimate this growth rate is to use the sustainable growth rate. Look back at Chapter 4 and find the formula for the sustainable growth rate. Using the annual income statement and balance sheet, calculate the sustainable growth rate for the Kellogg Company (K). Find the most recent closing monthly stock price under the "Mthly. Adj. Prices" link. Using the growth rate you calculated, the most recent dividend per share, and the most recent stock price, calculate the required return for Kellogg’s shareholders. Does this number make sense? Why or why not?
Calculating Growth Rates Coca-Cola (KO) is a dividend-paying company. Recently, dividends for Coca-Cola have increased at about 8 percent per year. Find the most recent closing monthly stock price under the "Mthly. Adj. Prices" link. Locate the most recent annual dividend for KO and calculate the dividend yield. Using your answer and the 8 percent dividend growth rate, what is the required return for shareholders? Suppose instead that you know the required return is 13 percent. What price should Coca-Cola stock sell for now? What if the required return is 15 percent?
