Final answer:
Given that Fake Company Epsilon maintains a fixed dividend of $2.35 and has a stock price of $27.65, the market's required return, or dividend yield, for the stock is calculated to be about 8.5%. Hence, the correct answer is option (A).
Step-by-step explanation:
The question asks about the market's view of the required return for Fake Company Epsilon's stock given its dividend and stock price. The required return can be estimated using the dividend yield formula, which is the annual dividend per share divided by the price per share. In this case, Fake Company Epsilon's annual dividend is $2.35, and its current stock price is $27.65.
To calculate the dividend yield, which represents the market's view of the required return when there's no growth, you use the formula:
Dividend Yield = Dividend ÷ Stock Price.
Therefore, the calculation for the required return is $2.35 ÷ $27.65, which equals approximately 0.085, or 8.5%.
This indicates that the market's required return for Fake Company Epsilon, under the assumption there is no growth in the dividend, is about 8.5%.