Explanation

The Gordon growth model formula is:

$V_0 = \frac{D_1}{r - g}$

Where:

• $V_0$ is the current stock value ($92).
• $D_1$ is the next year's dividend, calculated as $D_0 \times (1 + g)$.
• $r$ is the required return.
• $g$ is the dividend growth rate (4%).

To solve for $r$, rearrange the formula:

$r = \frac{D_1}{V_0} + g$

Substitute the given values:

$D_1 = 4 \times (1 + 0.04) = 4.16$ $r = \frac{4.16}{92} + 0.04 = 0.0452 + 0.04 = 0.0852 \text{ or } 8.52\%$

Why the other options are incorrect:

• Option A (8.35%): Incorrectly uses $D_0$ instead of $D_1$.
• Option C (9.44%): Incorrectly uses $E_0$ (current EPS) instead of $D_1$.