Question

The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?

Answer 1

Answer:

6.41%

Explanation:

This can be solved using the market return formula from the Dividend Discount Model (DDM). The formula is:

$r=\frac{Div_{1}}{P_0} + g$

Where

r is the market rate of return of the stock

$Div_{1}$ is the divided for next year

$P_0$ is the market price of the stock currently

g is the growth rate

Now, given dividend of next year is $2.28

Also, current market price is $47.92

Rate of growth of dividend is 1.65% or 0.0165

Now substituting, we get our answer:

$r=\frac{Div_{1}}{P_0}+g\\r=\frac{2.28}{47.92}+0.0165\\r=0.0641$

Converting this to percentage:

0.0641 * 100 = 6.41%