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13 May, 11:44

The common stock of Auto Deliveries sells for $26.46 a share. The stock is expected to pay $2.00 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 5.0 percent annually and expects to continue doing so. What is the market rate of return on this stock?

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  1. 13 May, 14:47
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    The market rate of return on the stock is 12.55%

    Explanation:

    Computing the market rate of return on the stock is as:

    Selling price of common stock = Expected price per share / (Rate of return [R] - Dividend)

    where

    Selling price of common stock is $26.46

    Expected price per share is $2.00 per share

    Dividend is 5.0%

    Putting the values above:

    $26.46 = $2.0 / (R - 5%)

    $26.46 = $2.0 / (R - 0.05)

    R - 0.05 = $2.0 / $26.46

    R - 0.05 = 0.0755

    R = 0.0755 + 0.05

    Rate of return = 0.1255 or 12.55%
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Home » Business » The common stock of Auto Deliveries sells for $26.46 a share. The stock is expected to pay $2.00 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 5.
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