The common stock of BJ's Auto Clinic sells for $38.25 a share. The stock is expected to pay $1.90 per share next month when the annual dividend is distributed. BJ's has established a pattern of increasing their dividends by 2.5% annually and expects to continue doing so. What is the market rate of return on this stock?

Question

Quizplus · Accepted Answer

The market rate of return on this stock can be calculated using the dividend discount model for a stock with growing dividends, which is given by the formula: $r = \frac{D_1}{P_0} + g$, where $r$ is the required rate of return, $D_1$ is the dividend next period, $P_0$ is the current price, and $g$ is the growth rate. Here, $D_1 = $1.90$, $P_0 = $38.25$, and $g = 2.5\%$. Plugging these values in gives $r = \frac{1.90}{38.25} + 0.025 = 0.0497 + 0.025 = 0.0747$ or 7.47%.

The Common Stock of BJ's Auto Clinic Sells for $38