Question

A stock just announced that its next annual dividend will be $1.02 and it expects to increase that dividend by 2.5 percent annually. The stock is currently selling for $28 a share. How do you compute the expected rate of return?

a) i = ($1.02/$28) + 0.025
b) i = [($1.02 x 1.025)/$28] + 0.025
c) i = ($1.02/$28) - 0.025
d) i = ($1.02 X 1.025)/$28

Answer 1

Answer: A. i = ($1.02/$28) + 0.025

Step-by-step explanation:

The expected rate of return will be calculated as:

= (Expected dividend/Price today) + growth rate

where,

Expected dividend = $1.02

Price today = $28

Growth rate = 2.5%

Then, slotting the figures into the equation will give:

= (1.02/28) + 2.5%

= (1.02/28) + 0.025

Therefore, the correct option is A