The common stock of Eddie's Engines Corp. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?
A) 7%
B) 9%
C) 11%
D) 13%
E) 15%

Question

Quizplus · Accepted Answer

The market rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model): $ r = \frac{D_1}{P_0} + g $, where $ D_1 $ is the expected dividend, $ P_0 $ is the current stock price, and $ g $ is the growth rate. Here, $ r = \frac{1.80}{25.71} + 0.04 = 0.11 $ or 11%.

The Common Stock of Eddie's Engines Corp