The Hopkinton Company just paid $2.25 as its annual dividend. The dividends have been increasing at a rate of 5% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock?

Question

Quizplus · Accepted Answer

The rate of return on the stock can be calculated using the dividend discount model for a stock with constant growth, which is given by the formula: $r = \frac{D_1}{P_0} + g$, where $r$ is the required rate of return, $D_1$ is the dividend next year, $P_0$ is the current price of the stock, and $g$ is the growth rate of the dividend. Given that the dividend just paid is $2.25 and it is growing at a rate of 5% annually, the dividend next year ($D_1$) will be $2.25 * (1 + 0.05) = $2.3625. The current stock price ($P_0$) is $63.60, and the growth rate ($g$) is 5% or 0.05. Plugging these values into the formula gives us: $r = \frac{2.3625}{63.60} + 0.05 = 0.03716 + 0.05 = 0.08716$ or 8.7%.

The Hopkinton Company Just Paid $2