Risk Metrics 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 Risk Metrics?
A)13.6%
B)13.9%
C)15.6%
D)16.9%
E)none of the above

Question

Quizplus · Accepted Answer

To calculate the market capitalization rate, we can use the dividend discount model:
r = (D1 / P0) + g
Where:
D1 = expected dividend payment next year = $3.50
P0 = current market price = $90.00
g = expected dividend growth rate = 10%

Plugging in the values, we get:
r = (3.50 / 90.00) + 0.10 = 0.139 or 13.9%

Therefore, the market capitalization rate for Risk Metrics is 13.9%, which is closest to choice B (13.9%).

Risk Metrics Company Is Expected to Pay a Dividend of $3.50