Questionable Systematic Risk Company is expected to pay a dividend of $3.50 in the coming year.Dividends are expected to grow at a rate of 10% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock is trading in the market today at a price of $90.00.What is the market capitalization rate for Questionable Systematic Risk?

Question

Quizplus · Accepted Answer

To calculate the market capitalization rate or the required rate of return for the stock, we can use the dividend discount model (DDM):

Market capitalization rate = (Dividend / Stock Price) + Dividend Growth Rate

Dividend for the coming year = $3.50
Dividend Growth Rate = 10%
Stock Price = $90.00

Therefore,

Market capitalization rate = (3.50 / 90) + 0.10
Market capitalization rate = 0.039 + 0.10
Market capitalization rate = 0.139 or 13.9%

Hence, the best choice is B.

Questionable Systematic Risk Company Is Expected to Pay a Dividend