Question

The common stock of Auto Deliveries sells for $27.21 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 4.6 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Answer 1

Market rate of return on stock = 11.2152%

Step-by-step explanation:

Details provided are

Market rate per share = $27.21

Dividend to be paid at year end = $1.80

Expected dividend growth rate = 4.6%

Expected return of market has to be calculated.

Using the dividend growth model we have,

`Price\ of\ share\ = (Dividend\ at\ year\ end)/(Market\ return\ - Growth\ rate)`

`27.21 = (1.80)/(Rm - 4.6)`

Market return - growth =
`(1.8)/(27.21) = 6.6152`

Market return = 6.6152 + 4.6 = 11.2152%

Market rate of return on stock = 11.2152%