Question

1. The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3% annually and expects to continue doing so. What is the required rate of return on this stock?

   	A.	7.42%
   	B.	7.79%
   	C.	19.67%
   	D.	20.14%
   	E.	20.86%

Answer 1

Req Ret = [ Expected Div / Price ] + Growth rate

= [ 1.35 / 28.16 ] + 0.03

= 0.0479 + 0.03

= 0.0779

i.e 7.79%

Option B is correct.

Answer 2

Given :

P₀ = 28.16 ($)

D1 = 1.35 ($)

g = 3 % = 0.03

Now,

Market rate of return, r 

= D₁ / P ₀ + g

= 1.35 / 28.16 + 0.03

= 0.0779

= 7.79 %

Market rate of return is : Option B.   7.79%  (ANSWER).