Question

A firm’s stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $60 over the next twelve months. What is the expected return?
a. 20%

b. 24%

c. 4%

d. 16%

Answer 1

Answer:

Expected rate of return will be 24%

So option (b) will be correct option

Explanation:

We have given dividend in next year will be $2

So dividend $D_1=2$$

Current stock price $P_0$ = $50

And it is given that in next year stock price is $60

So growth rate $=\frac{60-50}{50}=0.2$ = 20%

We have to find the expected return after 12 month, that is after 1 year

We know that current price is given by $P_0=\frac{D_1}{R_e-g}$

$50=\frac{2}{R_e-0.2}$

$50R_e-10=2$

$50R_e=12$

$R_e=0.24$ = 24%

So expected rate of return will be 24%

So option (B) will be correct option