A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25 percent growth rate, what is its expected return?
A) 3.44 percent
B) 3.61 percent
C) 11.25 percent
D) 14.69 percent

Question

Quizplus · Accepted Answer

The expected return can be calculated using the dividend discount model (also known as the Gordon growth model) formula: Expected Return = (Dividend Payment / Current Stock Price) + Growth Rate. Plugging in the given values: Expected Return = ($2.25 / $65.40) + 11.25% = 0.0344 + 11.25% = 14.69%.

A Company's Current Stock Price Is $65