Question

What is the expected rate of return for a stock that is expected to pay $0.5 dividend next year and is currently selling for $9. The price of the stock next year is expected to be $11 by next year.

Answer 1

Expected rate of return is 27.8%

Step-by-step explanation:

The Price of the stock is the present value using the expected rate of return of all the cash flows associated with the stock.

Use the following formula to calculate the expected rate of return

Expected rate of return = [ ( P1 - P0 ) + DPS1 ] / P0

Expected rate of return = [ ( $11 - $9 ) + $0.5 ] / $9

Expected rate of return = 0.278

Expected rate of return = 27.8%