Question

Steady As She Goes, Inc, will pay a year-end dividend of $2.5 per share. Investors expect the dividend to grow at a rate of 5.5 percent indefinitely. a. If the stock currently sells for $35 per share, what is the expected rate of return on the stock? (Round your answer to 2 decimal places.)

Answer 1

The expected rate of return on the stock is 7.14%.

Step-by-step explanation:

To calculate the expected rate of return on the stock, we can use the dividend discount model. The formula for the expected rate of return is:

Expected Rate of Return = Dividend / Stock Price + Growth Rate

Here, the dividend is $2.5 per share, the stock price is $35 per share, and the growth rate is 5.5%. Substituting these values into the formula, we get:

Expected Rate of Return = 2.5 / 35 + 0.055 = 0.07143 or 7.14%

Therefore, the expected rate of return on the stock is 7.14%.