Butler Corp paid a dividend today of $3.50 per share. The dividend is expected to grow at a constant rate of 8% per year. If Butler Corp stock is selling for $75.60 per share, the stockholders' expected rate of return is:
To calculate the stockholders' expected rate of return, we can use the dividend growth model, also known as the Gordon Growth Model.
The formula for the Gordon Growth Model is:
Expected Rate of Return = Dividend Yield + Dividend Growth Rate
First, let's calculate the Dividend Yield:
Dividend Yield = Dividend / Stock Price
In this case, the dividend is $3.50 per share, and the stock price is $75.60 per share.
Dividend Yield = $3.50 / $75.60 = 0.0462 (or 4.62%)
Next, let's calculate the Dividend Growth Rate:
The question states that the dividend is expected to grow at a constant rate of 8% per year.
Dividend Growth Rate = 8% = 0.08
Now let's plug the values into the formula:
Expected Rate of Return = 0.0462 + 0.08 = 0.1262 (or 12.62%)
So, the stockholders' expected rate of return on Butler Corp stock is 12.62%.