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8 February, 12:46

Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share?

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  1. 8 February, 14:04
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    13.50%

    Explanation:

    The computation of the market rate of return is shown below:

    Current selling price for share = Annual dividend : (Market rate of return - growth rate)

    $22 = $2.42 : (Market rate of return - 2.5%)

    (Market rate of return - 2.5%) = $2.42 : $22

    (Market rate of return - 2.5%) = 11%

    So, the market rate of return would be

    = 11% + 2.5%

    = 13.50%
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