Question

Bikes and More just announced its next annual dividend will be $2.42 a share and all future dividends will increase by 2.5 percent annually. What is the market rate of return if this stock is currently selling for $22 a share?

Answer 1

13.5%

Step-by-step explanation:

market rate of return can be calculated with below expresion

Current Price = D / (K - g)

Where

Current Price = $22 a share

D= Dividend in coming Year

dividend = $2.42

K= rate of return

g =growth rate

22 = 2.42 / (K - 0.025)

Cross multiply we have

22(K - 0.025)= 2.42

Open the bracket we have

22k- 0.55=2.42

2.42 + 0.55= 22k

K = 2.97 / 22

= 0.135

= 0.135×100%

= 13.5%

Therefore, the market rate of return if this stock is currently selling for $22 a share is 13.5