Required Rate of Return Calculation

This problem can be solved using the Gordon Growth Model (also known as the Dividend Discount Model) for calculating the required rate of return (k) on a stock with constant dividend growth.

Gordon Growth Model Formula

The formula is:

$k = \frac{D_1}{P_0} + g$

Where:

• \(k\) = Required rate of return
• \(D_1\) = Expected dividend per share next year
• \(P_0\) = Current market price per share
• \(g\) = Constant dividend growth rate

Given Information

• Current Market Price (\(P_0\)): ₹ 90
• Expected Dividend Next Year (\(D_1\)): ₹ 4.50
• Constant Growth Rate (\(g\)): 8% or 0.08

Calculation Steps

1. Substitute values into the formula:

   $k = \frac{₹ 4.50}{₹ 90} + 0.08$

2. Calculate the dividend yield component:

   $\frac{4.50}{90} = 0.05$

3. Add the growth rate:

   $k = 0.05 + 0.08$

4. Determine the required rate of return:

   $k = 0.13$

   Convert this decimal to a percentage: \(0.13 \times 100 = 13\%\).

Therefore, the shareholder's required rate of return is 13%.