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

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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