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.