Thomas Brothers stock is selling for $6.25 per share and it is expected to pay a

Question

Thomas Brothers stock is selling for $6.25 per share and it is expected to pay a $.50 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 7% per year. What is expected rate of return on the stock ? Thomas Brothers stock is selling for $6.25 per share and it is expected to pay a $.50 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 7% per year. What is expected rate of return on the stock ?

Explanation / Answer

Stock price =dividend/r-g

6.25=.50/(r-0.07)

r-0.07=.50/(6.25)

r-0.07=0.08

r=0.08+0.07=.15=15%

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