You expect a stock to pay a dividend of $2 a share in the upcoming year,and you expect that dividends will grow by 12% a year.If the current price of the stock is $50,its expected return is 16%.

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the expected return:

Expected return = (expected dividend / current price) + expected dividend growth rate
Expected return = ($2 / $50) + 0.12
Expected return = 0.04 + 0.12
Expected return = 0.16 or 16%

Therefore, the statement is true.

You Expect a Stock to Pay a Dividend of $2