The ordinary equity of Eddie's Engines,Inc.sells for €25.71 a share.The equity is expected to pay €1.80 per share next month when the annual dividend is distributed.Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so.What is the market rate of return on this equity?
A)7%
B)9%
C)11%
D)13%
E)15%

Question

Quizplus · Accepted Answer

To determine the market rate of return on the equity, we can use the dividend capitalization model. This model states that the market rate of return on the equity is equal to the dividend yield plus the expected annual growth rate.

Dividend yield = Annual dividend / Current stock price = €1.80 / €25.71 = 0.07 = 7%

Expected annual growth rate = 4%

Market rate of return = Dividend yield + Expected annual growth rate = 7% + 4% = 11%

Therefore, the correct answer is C) 11%.

The Ordinary Equity of Eddie's Engines,Inc