A firm's stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $53 over the next year. What is the expected return?

Question

Quizplus · Accepted Answer

To calculate the expected return, we use the following formula:

Expected return = (dividend yield + capital gains yield)

Dividend yield = Dividend / Current stock price 
Dividend yield = $2 / $50 = 0.04 or 4%

Capital gains yield = (Ending price - Beginning price) / Beginning price 
Capital gains yield = ($53 - $50) / $50 = 0.06 or 6%

Expected return = (4% + 6%) = 10%

Therefore, the expected return is 10%, which corresponds to choice B.

A Firm's Stock Is Expected to Pay a $2 Annual