Question

The common stock of Eddie's Engines, Inc., sells for $37.13 a share. The stock is expected to pay a dividend of $3.10 per share next year. Eddie's has established a pattern of increasing their dividends by 5.2 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Answer 1

13.55%

Step-by-step explanation:

The common stock of Eddies engines is sold at $37.13 per share

The stock is expected to make a payment of $3.10 per share next year

The growth rate is 5.2%

Therefore, the market rate of return on the stock can be calculated as follows

Market rate of return= Next dividend payment/stock price × growth rate

= $3.10/$37.13 + 5.2%

= 0.0835×100 + 5.2%

= 8.35%+5.2%

= 13.55%

Hence the market rate of return on this stock is 13.55%