Question

The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this stock? 

A. 7.59 percent  

B. 7.43 Percent  

C. 7.67 percent  

D. 7.14 percent  

E. 7.28 percent

Answer 1

rate of returns

= D1/P +G

D1= Dividend next year 2.28

P= price at present =43.19

G=growth rate of dividends =2.15%

= 2.28/43.19 +2.15%

=7.43%

Answer 2

Given :

P₀ = 43.19 ($)

D₁ = 2.28 ($)

g = 2.15 % = 0.0215

Now,

Dividend yield = D₁/P₀ 

= 2.28/43.19

= 0.0528

Market rate of return, r 

= Dividend yield + g

= 0.0528+ 0.0215

= 0.0743

= 7.43 % 

So, market rate of return = 7.43 % (ANSWER).