Question

The common stock of Auto Deliveries sells for $26.46 a share. The stock is expected to pay $2.00 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 5.0 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Answer 1

Answer:

The market rate of return on the stock is 12.55%

Explanation:

Computing the market rate of return on the stock is as:

Selling price of common stock = Expected price per share / (Rate of return [R] - Dividend)

where

Selling price of common stock is $26.46

Expected price per share is $2.00 per share

Dividend is 5.0%

Putting the values above:

$26.46 = $2.0 / (R - 5%)

$26.46 = $2.0 / (R - 0.05)

R - 0.05 = $2.0 / $26.46

R - 0.05 = 0.0755

R = 0.0755 + 0.05

Rate of return = 0.1255 or 12.55%