Answer:
Market rate of return is 7.79%
Explanation:
The market rate of return on the stock can be computed using the market price of the stock , which is given below:
share market price =D1/(Expected market return-Dividend growth rate)
share market price is $28.16
D1 is the expected dividend next year which is given by $1.35
expected market return is the unknown
dividend growth rate is 3%
$28.16=$1.35/expected market return-3%
let y be the expected market return
$28.16=$1.35/y-3%
by cross multiplication the equation becomes
$28.16*(y-3%)=$1.35
y-3%=$1.35/$28.16
y=($1.35/$28.16)+3%
y=7.79%
Answer:
7.794%
Explanation:
We can use the Gordon growth model to determine the price of the stock:
current stock price = next year's dividend / (market rate of return - growth rate)
$28.16 = $1.35 / (market rate - 3%)
market rate - 3% = $1.35 / $28.16 = 4.794%
market rate = 4.794 + 3% = 7.794%
*the market rate of return is equal to the required rate of return (RRR)
