Expected Return A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year.Since analysts estimate the company will have an 11.25 percent growth rate,what is its expected return?
A)3.44 percent
B)3.61 percent
C)11.25 percent
D)14.69 percent

Question

Quizplus · Accepted Answer

To calculate the expected return, we need to use the dividend discount model. Expected return = (dividend yield + growth rate). Dividend yield = dividend/stock price = $2.25/$65.40 = 0.0344 or 3.44%. Growth rate = 11.25%. Therefore, expected return = 3.44% + 11.25% = 14.69%. So, the best choice is D.

Expected Return a Company's Current Stock Price Is $65