The common stock of Eddie\'s Engines, Inc. sells for $37.73 a share. The stock i

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%

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