Question

A firm’s stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $60 over the next twelve months. What is the expected return?

a. 20%

b. 24%

c. 4%

d. 16%

Answer 1

Expected rate of return will be 24%

So option (b) will be correct option

Step-by-step explanation:

We have given dividend in next year will be $2

So dividend
`D_1=2`$

Current stock price
`P_0` = $50

And it is given that in next year stock price is $60

So growth rate
`=(60-50)/(50)=0.2` = 20%

We have to find the expected return after 12 month, that is after 1 year

We know that current price is given by
`P_0=(D_1)/(R_e-g)`

`50=(2)/(R_e-0.2)`

`50R_e-10=2`

`50R_e=12`

`R_e=0.24` = 24%

So expected rate of return will be 24%

So option (B) will be correct option