The common stock of Eddies Engines Inc sellis for 2871 a sha

The common stock of Eddie\'s Engines, Inc. sellis for $2871 a share. The stock is expected to pay $3.60 per share next year Eddie\'s has established a pattern of increasing their dividends by 57 percent annually and expects to continue doing so. What is the market rate of return on this stock? O 23.45 percent O 676 percent O 18.24 percent O 798 percent O 12.54 percent

Solution

Current price per share = P0 = $28.71

Next dividend per share = D1 = $3.60

Growth rate = g = 5.7% = 0.057

Market rate of return = D/P0 + g

Market rateof return = ($3.60/$28.71) + 0.057 = 0.18239 = 18.24%

Hence, correct answer is 18.24%