Question

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return

Answer 1

Answer:

14.6%

Explanation:

we can use the Gordon growth  model to determine the market rate of return (or required rate of return for this stock or similar ones):

current stock price = dividend / (required rate of return - growth rate)

• current stock price = $26.91
• growth rate = 3.8%
• dividend in 1 year = $2.80 x 1.038 = $2.9064

$26.91 = $2.9064 / (RRR - 3.8%)

RRR - 3.8% = $2.9064 / $26.91 = 10.8%

RRR = 10.8% + 3.8% = 14.6%

Answer 2

Answer:

The market rate of return is 14.6%

Explanation:

In this question, we are asked to calculate the market rate of return for a stock having a particular selling rate at present.

Mathematically, the market rate of return =

[Current dividend * (1+growth rate)]/current stock price + growth rate

From the question, we identify the following;

Current dividend = $2.80

Growth rate = 3.8% = 0.038

Current price of stock = $26.91

We plug this values in the equation and we have the following;

Market rate of return = [$2.80 * (1+0.038)]/26.91 + 0.038 = [(2.8*1.038)/26.91] + 0.038 = 0.108 + 0.038 = 0.146 or 14.6%