KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually. What is the rate of return on this stock if the current stock price is $38.56 a share:a. 6.81% b. 7.87% c. 7.04% d. 7.69% e. 7.82%

a. 6.81%

Explanation:

We know that

Price of stock = Next year dividend : (Required rate of return - growth rate)

where,

Next year dividend would be

= $1.27 + $1.27 * 3.4%

= $1.27 + 0.04318

= $1.3132

The other items rate would remain same

Now put these values to the above formula

So, the value would equal to

$38.56 = $1.3132 : (Required rate of return - 3.4%)

(Required rate of return - 3.4%) = $1.3132 : $38.56

(Required rate of return - 3.4%) = 3.41%

So, the required rate of return would be

= 3.41% + 3.4%

= 6.81%