Question

Holt Fasner is considering purchasing the stock of United Mining Companies, which he plans to hold indefinitely. United Mining just paid an annual dividend of $2.00 and the price of the stock is $45 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Holt expect on his investment?

Answer 1

Answer:

10.71%

Explanation:

Calculation for annual rate of return that Holt expect on his investment

Using this formula

Annual rate of return=(D1/Current price)+Growth rate

Annual rate of return=(2*1.06/45)+(0.06)

Annual rate of return=2.12/45+(0.06)

Annual rate of return=0.0471+0.06

Annual rate of return=0.1071*100

Annual rate of return=10.71%

Therefore the annual rate of return that Holt expect on his investment will be 10.71%