Question

Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock price is $46. How is the expected rate of return computed

Answer 1

Answer:

Expected return=5.1%

Explanation:

The expected rate of return on the stock can be determined using the dividend valuation model

According to this model, the value of a stock is the sum of the present values of the future dividend  that would arise from it discounted at the required rate of return.

Using this model,

Cost of equity (Ke) =( D(1+g)/P) + g

Div in year 0, P= ex-div market price, g= growth rate in dividend

For this question

Expected rate of return = (1.42×(1+0.02)/46  + 0.02= 5.1%

Expected return=5.1%