Answer:
14.90%
Explanation:
We know,
Current stock price, [tex]P_{0}[/tex] = [tex]\frac{D_{1}}{r_{s} - g}[/tex]
Given,
Current stock price, [tex]P_{0}[/tex] = $12.00
growth rate, g = 9.50% = 0.095
Expected annual dividend, [tex]D_{1}[/tex] = $0.65
We have to determine the expected rate of return ([tex]r_{s}[/tex]).
Putting the values into the above formula, we can get,
Current stock price, [tex]P_{0}[/tex] = [tex]\frac{D_{1}}{r_{s} - g}[/tex]
or, $12.00 = $0.65 ÷ ([tex]r_{s}[/tex] - 0.095)
or, $12.00 × ([tex]r_{s}[/tex] - 0.095) = $0.65
or, [tex]r_{s}[/tex] - 0.095 = $0.65 ÷ $12.00
or, [tex]r_{s}[/tex] - 0.095 = 0.0542
or, [tex]r_{s}[/tex] = 0.054 + 0.095
Therefore, [tex]r_{s}[/tex] = 0.149
The expected rate of return = 0.149 or 14.90%
