Jackson Corp common stock paid 250 in dividends last year D0

Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to
grow at a 12-percent annual rate forever. If Jackson’s current market price is $40.00, what is
the stock’s expected rate of return

Solution

As per constant growth dividend valuation model,

Market Price of a share (P0) = D0(1+g)/ (Ke - g)

Where D0 = Last Year Dividend = ($2.50)

G = Dividend growth rate (12%)

Ke = Expected Rate of Return

By applying the given data’s into the formula, We get

$40 = $2.50(1.12) / (Ke - 0.12)

$40 = $2.80 / (Ke - 0.12)

$2.80/$40 = (Ke - 0.12)

0.07 = Ke - 0.12

Ke = 0.07 + 0.12 = 0.19

Therefore, Expected Rate of Return (Ke) = 19%