An investor has expectations of a $4 dividend next year with future dividends growing at 6% in perpetuity. If the investor is willing to pay $80 for the stock, the investor's expected return is 11%.

Question

Quizplus · Accepted Answer

To calculate the expected return, we use the dividend discount model formula:

Expected Return = (Dividend/Price) + Dividend Growth
Expected Return = (4/80) + 0.06
Expected Return = 0.05 + 0.06
Expected Return = 0.11 or 11%

Since the expected return matches the investor's willingness to pay for the stock, the statement is true.

An Investor Has Expectations of a $4 Dividend Next Year