The common stock of Auto Deliveries sells for $28.16 a share.The stock is expected to pay $1.35 per share next year when the annual dividend is distributed.The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so.What is the market rate of return on this stock?
A)7.42 percent
B)7.79 percent
C)19.67 percent
D)20.14 percent
E)20.86 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend for the next year using the dividend growth rate of 3%:
Expected dividend = $1.35 x (1 + 3%) = $1.39

Next, we can use the dividend discount model to calculate the market rate of return:
Market rate of return = (expected dividend/stock price) + dividend growth rate
Market rate of return = ($1.39/$28.16) + 3%
Market rate of return = 7.79%

Therefore, the market rate of return on this stock is 7.79%, which is given by option B.

The Common Stock of Auto Deliveries Sells for $28