A company's current stock price is $50.00 and its most recent dividend was $2.00 per share. Since analysts estimate the company will have a 5 percent growth rate, what is its expected return?
A)2.20 percent
B)5.02 percent
C)7.00 percent
D)7.10 percent

Question

Quizplus · Accepted Answer

To calculate the expected return, we need to use the dividend discount model. 
Expected return = (dividend yield + growth rate)

Dividend yield = (dividend per share / stock price) x 100 
= (2 / 50) x 100 
= 4%

Expected return = (4% + 5%) 
= 9%
 
Therefore, the closest option is D) 7.10%, which is the closest to the calculated expected return of 9%.

A Company's Current Stock Price Is $50