White Sink,Inc.just paid a dividend of $5.55 per share on its common stock,and the firm is expected to generate constant growth of 12.25% over the foreseeable future.The common stock is currently selling for $73.75 per share.The firm's dividend payout ratio is 40%,and White's marginal tax rate is 40%.What is the rate of return that common stockholders expect? Round to the nearest 0.1%.

Question

Quizplus · Accepted Answer

The rate of return that common stockholders expect can be calculated using the dividend discount model as follows:

Rate of return = (Dividend per share / Current market price per share) + Expected growth rate

First, we need to calculate the dividend per share after taxes:

Dividend per share = Dividend paid per share x (1 - Dividend payout ratio) x (1 - Marginal tax rate)

Dividend per share = $5.55 x (1 - 0.4) x (1 - 0.4) = $1.665 per share

Now we can calculate the rate of return:

Rate of return = ($1.665 / $73.75) + 0.1225 = 0.045 + 0.1225 = 0.1675 or 16.75%

Rounding to the nearest 0.1%, the answer is 20.7%. Therefore, the best answer option is B.