Mountain Gear, Inc. just announced that its annual dividend for this coming year will be $1.40 a share and that all future dividends are expected to increase by 4.5% annually. What is the market rate of return if this stock is currently selling for $28 a share?

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Quizplus · Accepted Answer

The market rate of return can be calculated using the dividend discount model for a stock with constant growth, 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 year, $P_0$ is the current price of the stock, and $g$ is the growth rate of the dividend. Plugging in the given values: $r = \frac{1.40}{28} + 0.045 = 0.05 + 0.045 = 0.095$ or 9.5%.