Jackson Corp.common stock paid $2.50 in dividends last year (D₀).Dividends are expected to grow at a 12-percent annual rate forever.If Jackson's current market price is $40.00,what is the stock's expected rate of return (nearest .01 percent)?

Question

Quizplus · Accepted Answer

To find the expected rate of return, we can use the Gordon growth model:

Expected Rate of Return = (Dividend Yield + Dividend Growth Rate)

Dividend Yield = Annual Dividend/Stock Price = 2.50/40.00 = 0.0625

Dividend Growth Rate = 12%

Expected Rate of Return = 0.0625 + 0.12 = 0.1825 or 18.25%

Therefore, the answer is (D) 19.00%.