A firm’s stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $60 over the next twelve months. What is the expected return?

a. 20%

b. 24%

c. 4%

d. 16%

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aristeus aristeus · Answer 1 · 2020-02-05T11:15:26+01:00

Answer:

Expected rate of return will be 24%

So option (b) will be correct option

Explanation:

We have given dividend in next year will be $2

So dividend [tex]D_1=2[/tex]$

Current stock price [tex]P_0[/tex] = $50

And it is given that in next year stock price is $60

So growth rate [tex]=\frac{60-50}{50}=0.2[/tex] = 20%

We have to find the expected return after 12 month, that is after 1 year

We know that current price is given by [tex]P_0=\frac{D_1}{R_e-g}[/tex]

[tex]50=\frac{2}{R_e-0.2}[/tex]

[tex]50R_e-10=2[/tex]

[tex]50R_e=12[/tex]

[tex]R_e=0.24[/tex] = 24%

So expected rate of return will be 24%

So option (B) will be correct option