Question

Rate of return. Steady as She Goes, Inc., will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4 percent indefinitely. If the stock currently sells for $30 per share, what is the expected rate of return on the stock?

a) 10%
b) 12%
c) 16%
d) 20%

Answer 1

The expected rate of return on the stock is calculated by adding the dividend yield and the expected growth rate. In this case, the expected rate of return is 14%, which is closest to option (c) 16%.

Step-by-step explanation:

To calculate the expected rate of return on the stock, we need to consider both the dividend yield and the expected growth rate of the dividend. The dividend yield is the annual dividend divided by the current stock price. In this case, the dividend yield is $3/$30 = 0.1, or 10%. The expected growth rate is given as 4%.

To find the expected rate of return, we can use the formula:

Expected Rate of Return = Dividend Yield + Expected Growth Rate

= 0.1 + 0.04 = 0.14, or 14%

Therefore, the expected rate of return on the stock is 14%, which is closest to option (c) 16%.