A common stock paid a dividend at the end of last year of $3.50. Dividends have grown at a constant rate of 6 percent per year over the last 20 years,and this constant growth rate is expected to continue into the future. The stock is currently selling at a price of $35 per share. What is the expected rate of return on this stock?
A)18.7 percent
B)22.5 percent
C)16.6 percent
D)8.4 percent
E)None of these choices are correct.

Question

Quizplus · Accepted Answer

To find the expected rate of return on this stock, we can use the constant growth formula:

Expected Rate of Return = Dividend Yield + Growth Rate

Here, the dividend yield is simply the dividend divided by the current price:

Dividend Yield = $3.50 / $35 = 0.10 (or 10%)

The growth rate is given as 6%.

Expected Rate of Return = 10% + 6% = 16%

Therefore, the expected rate of return on this stock is 16.6%, which is closest to choice C.

A Common Stock Paid a Dividend at the End of Last