Homework Answers
(a)
Compute the expected return (R), using the equation as shown below:
R = Annual dividend/ Market price of a share
= $2.75/ $35.24
= 7.80%
Hence, the R is 7.80%
(b)
The required rate of return (R) is the minimum return that an investor expect to earn from any investment. The expected return (ER) is the return which an investor expects from the investment. If the R is more than the ER, then the investor should sell the share of stock.
In the given case the ER is 7.80% and the R is 11%, this means the required rate is more than the expected rate of return and hence, the investor should sell the share of stock.
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