The common stock of Eddie's Engines,Inc. sells for $20 a share. The stock is expected to pay $2 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) 14%
B) 14.4%
C) 15%
D) 17%
E) 19%

Question

Quizplus · Accepted Answer

The market rate of return is the dividend yield plus the expected capital gains yield. The dividend yield is the annual dividend divided by the current stock price, or $2/$20 = 10%. The expected capital gains yield is the expected annual increase in the stock price divided by the current stock price, or 4%. Therefore, the market rate of return is 10% + 4% = 14%.

The Common Stock of Eddie's Engines,Inc