An issue of ordinary shares currently sells for $40.00 per share, has an expected dividend to be paid at the end of the year of $2.00 per share, and has an expected growth rate to infinity of 5% per year.The expected rate of return on this security is [blank].

Question

Quizplus · Accepted Answer

The expected rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model): Expected Return = (Dividend/Price) + Growth Rate = ($2.00/$40.00) + 5% = 5% + 5% = 10%.

An Issue of Ordinary Shares Currently Sells for $40