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

To calculate the market rate of return, we need to use the dividend discount model:

Market rate of return = (dividend per share / market price per share) + dividend growth rate

Dividend per share = $1.90
Market price per share = $38.25
Dividend growth rate = 2.5%

Market rate of return = ($1.90 / $38.25) + 0.025 = 0.0724 or 7.24%

Therefore, the best choice is D, 7.47% because it is the closest to the calculated market rate of return.

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