Mercury Racquetballs just paid an annual dividend of $2.03 on its common stock and increases its dividend by 2.75 percent annually.What is the rate of return on this stock if the current stock price is $49.50 a share?

Question

Quizplus · Accepted Answer

The rate of return on a stock is calculated by dividing the annual dividend by the current stock price. In this case, the annual dividend is $2.03 and the current stock price is $49.50. Therefore, the rate of return is $2.03/$49.50 = 0.041, or 4.1%. However, the question states that the dividend increases by 2.75% annually. This means that the dividend in the next year will be $2.03 * 1.0275 = $2.08. The dividend in the year after that will be $2.08 * 1.0275 = $2.13, and so on. Therefore, the rate of return on this stock is not constant, but rather increases by 2.75% each year. To calculate the rate of return for the first year, we can use the formula:Rate of return = (Dividend / Current stock price) * (1 + Dividend growth rate)Rate of return = ($2.03 / $49.50) * (1 + 0.0275)Rate of return = 0.041 * 1.0275Rate of return = 0.042, or 4.2%Therefore, the rate of return on this stock for the first year is 4.2%.

Mercury Racquetballs Just Paid an Annual Dividend of $2