Question

(Common stockholder expected retum) If you purchased 125 shares of common stock that pays an end-of-year dividend of $2.25, what is your expected rate of return if you purchased the stock for $32.81 per share? Assume the stock is expected to have a constant growth rate of 9 percent. Your expected rate of return is \%. (Round to two decimal places.)

Answer 1

The expected rate of return on the common stock bought at $32.81 per share with an annual dividend of $2.25 and a growth rate of 9% is 15.85%.

Step-by-step explanation:

To calculate the expected rate of return on a common stock, we use the dividend discount model which accounts for the dividend received as well as the expected stock price growth rate (capital gains). For a stock with an end-of-year dividend of $2.25, purchased at $32.81 per share, and having a constant growth rate of 9%, the expected rate of return can be calculated as follows:

Expected Rate of Return = (Dividend / Price per share) + Growth rate = ($2.25 / $32.81) + 0.09

Plugging in the values, the expected rate of return is thus:

Expected Rate of Return = (2.25 / 32.81) + 0.09 ≈ 0.0685 + 0.09 = 0.1585 or 15.85%

Therefore, if you purchased 125 shares of common stock, your expected rate of return is 15.85% (rounded to two decimal places).