Martha's recently paid an annual dividend of $3.60 on its common stock.This dividend increases by 2.5 percent per year.What is the market rate of return if the stock is selling for $32.65 a share?

Question

Quizplus · Accepted Answer

The market rate of return is the dividend yield plus the expected growth rate. The dividend yield is the annual dividend divided by the current stock price. The expected growth rate is the percentage by which the dividend is expected to increase each year. In this case, the annual dividend is $3.60, the current stock price is $32.65, and the expected growth rate is 2.5%. Therefore, the dividend yield is 3.60/32.65 = 11.03%, and the expected growth rate is 2.5%. The market rate of return is therefore 11.03% + 2.5% = 13.80%.

Martha's Recently Paid an Annual Dividend of $3