The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g)is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?

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Quizplus · Accepted Answer

This formula is known as the Constant Growth Model, and it calculates the expected rate of return on a stock that is growing at a constant rate. The formula is (D₁/Vc) + g, where D₁ is the next expected dividend, Vc is the current value of the stock, and g is the growth rate of the dividend. This formula takes into account both the current yield on the stock, as indicated by D₁/Vc, and the expected growth rate of the dividend, as indicated by g.

The Expected Rate of Return on a Share of Common