How to Calculate the Required Return on an Equity With a Dividend Payout Per Share
The calculation of a stock's required return is an estimate, as it requires projecting future dividends and the value of a stock. Also, given the fluctuation of a stock's price from day to day, the calculated amount will vary slightly. However, there are steps that provide a solid formula for determining the required return on stock using dividend payout per share.
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Instructions
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Determine the expected dividend growth rate. If the dividend remains constant from year to year, the growth rate is zero. If the dividends do grow from year to year estimate how much it will grow, using either past annual dividends or the dividend from the current year and the dividend announced for the next year. To calculate the growth rate using last year's and this year's dividend, begin by subtracting last year's dividend from the current year's. Then divide that amount by last year's dividend. This will give you the dividend's growth rate.
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Look-up the stock's current fair market value (FMV). If the stock is publicly traded, this should not be an issue, as you can look up the value on a variety of financial websites. If the stock is for a private corporation, consult with the company's accounting department and ask for an estimate of the share price. You need the price of share of the company.
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3
Determine when the dividend is to be paid. For this calculation, you need the dividend that will be paid one year from the calculation. If the latest announced dividend is for the current year, project the dividend for next year using the expected dividend growth rate. Begin by adding 1 to the growth rate, and then take the result and multiply it by the dividend to be paid in the current year.
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Divide the value of the dividend that will be issued in a year by the current value of the stock. This will provide you with the total required return.
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Add the dividend growth rate from the total required return. This amount is the required return on equity. The value should be less than 1, as the required return is expressed as a percentage.
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