Question

The common stock of Auto Deliveries currently sells for $28.99 a share. The stock is expected to pay an annual dividend of $1.34 per share next year. The firm has established a pattern of increasing its dividends by 4 percent annually and expects to continue doing so. The estimated market rate of return on this stock is _______ percent.

Answer 1

Answer:

8.62%

Explanation:

The common stock of Auto deliveries currently sells for $28.99 per share

The stock is expected to pay a dividend of $1.34

The growth rate is 4%

= 4/100

= 0.04

Therefore, the market rate of return on the stock can be calculated as follows

Market rate= dividend/stock price + growth rate

= $1.34/$28.99 + 0.04

= 0.04622+0.04

= 0.0862×100

= 8.62%

Hence the estimated market rate of return on the stock is 8.62%