ABC common stock paid $2.50 in divedends last year. Divedends are expected to grow at a 12% aanual rate forever. If ABC current market price is $40.00, what is the stock's expected rate of return(nearest .01%)?

I come up with 18.25%, am I correct?

To calculate the expected rate of return, we need to use the dividend discount model (DDM) formula. The DDM formula is as follows:

Expected Rate of Return = (Dividend / Stock Price) + Dividend Growth Rate

Given the following information:

Dividend = $2.50
Stock Price = $40.00
Dividend Growth Rate = 12% (or 0.12 as a decimal)

Plugging these values into the DDM formula, we get:

Expected Rate of Return = ($2.50 / $40.00) + 0.12

Calculating this, we have:

Expected Rate of Return = 0.0625 + 0.12

Expected Rate of Return = 0.1825

To convert this to a percentage, we multiply by 100:

Expected Rate of Return = 18.25%

Therefore, your answer of 18.25% is indeed correct.