A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?
A) 4.14 percent
B) 4.26 percent
C) 10.00 percent
D) 14.14 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 = ($3.50 / $84.50) + 10% = 0.0414 + 10% = 14.14%.

A Company's Current Stock Price Is $84