McDonalds (MCD) is a strong dividend payer, increasing its dividend every year s
ID: 2469095 • Letter: M
Question
McDonalds (MCD) is a strong dividend payer, increasing its dividend every year since 2000. MCD currently pays a dividend of $3.56 per year per share (or $0.89 per quarter per share, with a dividend payout ratio of 71.74% according to Morningstar) which represents a 4.7% increase from its last dividend. Suppose we expect this level of dividend growth to continue indefinitely. Let MCD’s current share value be $127.61 (the actual closing price on 4/12/16). Using the constant growth dividend discount model, what is MCD’s required rate of return?
Explanation / Answer
Required rate of return = (Dividend payment / Stock price ) + Growth rate of the dividend
Dividend payment expected to be paid next year = 3.56 +(3.56*4.7%) = 3.72
Stock price = 127.61
Growth rate = 4.7%
Required rate of return = (3.72+127.61)+4.7%= 7.62 %