Sample Essay
Stock price today = Dividend in next period / (required rate of return – growth rate)
This equation can be represented in terms of required rate of return as follows:-
Required rate of return = Dividend in next period/ stock price today + growth rate
This would require the dividends paid in the next period, the stock price of the SLP Company today and the expected annual growth rate of dividends in the future (Berk, 2010).
Arbitrage Pricing Theory
Required rate of return = rf + β1f1 + β2f2 + β3f3 +…
This equation can be used to calculate required rate of return for a stock. This requires additional information such as different factors impacting the stock such as f1, f2 and so on which could be of any number. The individual betas represent the relationship between the stock’s price and the factor and thus the required rate of return can be derived via this method (Watson, 2006).
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