Question

he common stock of bj's auto clinic sells for $38.25 a share. the stock is expected to pay $1.90 per share next month when the annual dividend is distributed. bj's has established a pattern of increasing their dividends by 2.5 percent annually and expects to continue doing so. what is the market rate of return on this stock? 4.41 percent 4.97 percent 7.38 percent 7.47 percent 7.59 percent

Answer 1

The market rate of return on BJ's Auto Clinic stock is 4.97%, calculated using the dividend discount model with the stock's price, expected dividend, and yearly dividend growth rate.

Step-by-step explanation:

To determine the market rate of return on BJ's Auto Clinic stock, we use the formula for the dividend discount model (DDM), considering the stock sells for $38.25 and the expected dividend is $1.90 with an annual increase of 2.5%.

The rate of return is calculated by adding the dividend yield and the growth rate, which translates to the formula: {{(Dividend per share / Price per share) + Growth rate}}. Plugging in the numbers, we have {{($1.90 / $38.25) + 2.5%}}, which equals 4.97%. This is the market rate of return, before considering any capital gains from selling the stock at a higher price.