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?

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%