The common stock of Eddie\'s Engines, Inc. sells for $37.73 a share. The stock i
ID: 2654774 • Letter: T
Question
The common stock of Eddie's Engines, Inc. sells for $37.73 a share. The stock is expected to pay $3.70 per share next year. Eddie's has established a pattern of increasing their dividends by 5.8 percent annually and expects to continue doing so. What is the market rate of return on this stock?
10.20 percent
19.07 percent
6.86 percent
15.61 percent
9.81 percent
The common stock of Eddie's Engines, Inc. sells for $37.73 a share. The stock is expected to pay $3.70 per share next year. Eddie's has established a pattern of increasing their dividends by 5.8 percent annually and expects to continue doing so. What is the market rate of return on this stock?
Explanation / Answer
Price= 37.73 Dividend next year= 3.70 growth= 5.80% Price= Dividend/(Re-Growth) Hence, 37.73= 3.70/ (Re-5.8%) Thus, Re-5.8%= 3.70/37.73= 9.81% Hence, Re= 9.81%+5.8%= 15.61% Thus, answer is 15.61%