Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year.Dividends are expected to grow at the rate of 8% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 12%.The stock of Todd Mountain Development Corporation has a beta of 0.75.Using the CAPM,the return you should require on the stock is _________.

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of equity using CAPM:

Cost of Equity = Rf + Beta * (Rm - Rf)
Cost of Equity = 5% + 0.75 * (12% - 5%)
Cost of Equity = 9.75%

Next, we need to calculate the expected dividend for next year:

Expected Dividend = Dividend in the upcoming year * (1 + Dividend growth rate)
Expected Dividend = $2.50 * (1 + 8%)
Expected Dividend = $2.70

Finally, we can calculate the expected return on the stock using the dividend discount model:

Expected Return = (Expected Dividend / Current Stock Price) + Dividend Growth Rate
Expected Return = ($2.70 / Current Stock Price) + 8%

We don't have the current stock price, so we can't calculate the exact expected return. However, we can eliminate choices A, C, and D based on their percentages being too low, higher, and much higher than the cost of equity calculated using CAPM. Choice B is the best option, with an expected return of around 10% assuming a reasonable stock price.

Todd Mountain Development Corporation Is Expected to Pay a Dividend